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Aluminium has started attracting premiums in the international market due to shortage of floating stock. Industry executives and analysts feel these premiums are here to stay at elevated levels for the next two years, benefiting Indian producers such as Hindalco Industries and state-owned National Aluminium Company (Nalco).
Premiums are paid over the London Metal Exchange (LME) cash price to cover the cost of freight and insurance, and reflect regional demand and supply. But in recent months, aluminium premiums have risen two-three times the transportation cost, hinting at serious scarcity in the metal market. In the past few years, aluminium capacities have seen a fall due to a long period of subdued prices, which is causing the market to quote the metal at a premium.
The reasons: LME has stock of the metal which it is offloading but that might take a while to reduce the queue at its stockpiled and off-exchange warehouses (private warehouses not part of the exchanges recognised warehouses); owners are likely to keep holding stocks in anticipation of a further rise in premium.
In the US, aluminium premiums are ruling at $500 per tonne. In Europe, the level is a bit below $500 and in Japan premiums are at about $420 per tonne. “LME warehouses are discharging only 3,000-4,000 tonne metal daily and so it is going to take really long for the exchange to offload the 2008-2012 accumulated stocks,” Nic Brown, head of research with London-based Natxis Commodities told Business Standard. “Stockpiles at off-exchange warehouses, who's owners are largely the metal producers themselves, has no official regulatory body to set rules and so there is no idea when the metal from these warehouses will find its way out,” Brown added.
At present, LME and off-exchange warehouses together could be holding roughly eight-nine million tonnes of aluminium, said analysts.
Off-exchange warehouses are present all across the world, while LME has two large warehouses one at Netherlands with 1.8 million tonne stock and other at Detroit with 992,000-tonne inventory.
“There is a clear scarcity in the very nearterm and so we expect premiums to remain elevated and also move up slightly from the current levels, although not too high,” said Brown of Natxis.
Though the bullish trend in premiums is expected to continue, analysts were of the view that in the longterm perhaps, the market itself could have a solution to bring these down premiums.
Given the deficit in aluminium, if the market moves in backwardation, which means spot prices are higher than forwards, then off-exchange warehouse owners might get encouraged to release stocks in the market, leading to a drop in premiums.
“Another possibility of premiums declining in the long-term could be that we might see some more expansion plans completing, perhaps in India or in the West Asia, which could increase the supply and bring down the scarcity. This, too, could lower premiums in the longterm,” said Prakash Prabhu, senior analyst with Greenback Commodities.
Hindalco and Nalco are the top producers in the country. In the quarter ended September, both reported strong revenues on a year-on-year basis, indicating that high premiums have contributed to the top line.
“Premiums have gone up like never before and we do not see any reason for these to come down. Also, the demand-supply deficit is up in the global market ex-China and so, we see firmness in prices in the coming quarters,” Praveen Maheshwari, chief financial officer at Hindalco Industries, had said earlier. The company’s aluminium revenue shot up 41.5 per cent on a year-on-year basis to Rs 3,315 crore in the quarter gone by.
