April 3, 2014 5:53 pm

Aluminium jumps after halt to LME plan

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Aluminium has jumped 6 per cent in the week since the London Metal Exchange was forced to halt a plan to cut queues at its global warehouse network.

Prices for three-month delivery at the LME rose to $1,838 a tonne on Thursday, a five-month high. The increase will bring some relief to aluminium producers, including Rusal, Alcoa and Chinalco, which have all been forced to cut output sharply due to sustained low prices. Alcoa cut 147,000 tonnes of capacity at two smelters in Brazil last week.

Cautious optimism

Cautious optimism

Lightweight but strong, aluminium is one of the most widely consumed industrial metals and is used in the transportation, beverage can and construction industries. The price reached $3,114 a tonne in 2008, shortly before the financial crisis, but the build-up of vast stockpiles, estimated at more than 10m tonnes, has depressed prices since.

Nearly 5.5m tonnes of that inventory sit in LME-registered facilities. At some locations, where warehouse owners and metal traders entered into financing deals, queues to withdraw aluminium rose to more than 500 days last year. Following complaints from consumers, the LME announced new rules to cut queues, which were supposed to take effect this week.

But Rusal, the world’s largest producer, argued that the consultation process was unfair, and on March 27 won a UK court ruling to scrap the rule. Warehouse queues are expected to remain long for at least a few months more.

“The ruling appears to have been the trigger for prices rising over the past week,” said Stephen Briggs, analyst at BNP Paribas. Analysts say that the initial increase pushed the aluminium price through important technical levels, sparking further computer program-related buying.

The LME has the option of appealing against the court ruling or holding another consultation with the industry on the best way to tackle warehouse queues. David Wilson of Citigroup said that he expected the exchange to consult again soon.

Meanwhile, premiums to obtain physical metal are likely stay high. In Vlissingen, in the Netherlands, warrants for more than 211,000 tonnes of metal have been cancelled – meaning that owners have given notice to take delivery – since the court ruling.

This metal is added to the back of queues at Vlissingen, which now sit at 482 working days – nearly two years – Mr Wilson said. In the past, the industry perception was that queues were deliberately extended to increase the profits of warehouse owners and financiers.

Mr Wilson said it did not appear as if the price rally was sustainable, as the supply-demand dynamics had not changed.

“You need to have a deficit of at least 1m tonnes a year for several years to get rid of even the reported overhang [LME stocks] in the industry,” he said. “It could be a long time before you have a tight market.”

Outside China, the cuts to capacity are having an effect and the market is now in deficit. But inside China there is a growing surplus. While some smelting Chinese capacity has been shut due to high costs, more new capacity is coming online.

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