Special Report

Complete aluminium
premiums coverage

Part of the Metal Bulletin ‘2016 Survival Kit’ series

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Metal Bulletin Special Report | Aluminium Premiums
02
Copyright © 2002-2015 Metal Bulletin

Contents
Complete aluminium premiums coverage:
Page 3 .......... History of premiums / After the crisis
Page 5 .......... Aluminium premiums by specification
Page 6 .......... FAQs
Page 8 .......... Forecasts from Metal Bulletin

Editor’s choice articles:

Page 9 .......... Q1 MJP aluminium premium talks begin at $120
per tonne
Page 10......... US Midwest premium rises to 6-month high
Page 11.......... 2016 presents a mixed picture for European
Al premiums
Page 12 ......... Al premium contracts go untraded – a victim of
the LME’s success in tackling queues
Page 16 ......... HOTTER ON METALS: Aluminium spreads ease as
long gives back some of its position

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Part of the Metal Bulletin ‘2016 Survival Kit’ series

 Special Report
Metal Bulletin Special Report | Aluminium Premiums
History of premiums
The volatility of aluminium premiums has been by far the
biggest and most important development in the
aluminium market since the global financial crisis, and has
completely transformed the light metal’s price structure.
That new structure is now being passed through the value
chain, so that companies that are many steps removed
from the production of primary aluminium are being told
that their supply contracts must now incorporate the
aluminium premium.
But these companies have no experience with the
aluminium premium. They don’t know what it is, where it
comes from, and why it’s suddenly such a huge part of the
aluminium pricing dynamic.
Metal Bulletin launched its European aluminium premium in
1987. The London Metal Exchange’s aluminium contract,
launched in 1978, had by then become the de facto price
setter for the whole market, and the premium had come
about as a way to cover the logistical costs of moving metal
that were not covered in the exchange-discovered LME price.
To see the methodology that Metal Bulletin uses to assess
its aluminium premiums visit
www.metalbulletin.com/methodology
For more than 20 years the Metal Bulletin aluminium
premium served this purpose, only twice edging above the
$200-per-tonne mark and generally trading around $100
per tonne. Its consistency meant that when aluminium
buyers passed it through to customers, it was incorporated
within a standard processing upcharge added to the LME
aluminium price, in a way which buyers of, for example,
wire rod or can sheet became accustomed.
All other base metals traded on the London Metal Exchange
have such premiums as well, including copper and zinc.
Part of the Metal Bulletin ‘2016 Survival Kit’ series
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After the crisis
Then the sub-prime mortgage meltdown turned into the
global financial crisis, and everything changed. The cause
was banks and investors looking for alternative, safer
investment opportunities and finding them in the LME.
Aluminium has a very robust contango (meaning forward
prices are higher than cash prices) on its forward price
curve that the other base metals do not.
For people who bought aluminium for cash and sold
forward, this contango provided a guaranteed return that
exceeded what any government bond or triple-A rated
derivative could. As the money poured into the LME
aluminium contract, the LME price became detached from
the fundamentals of the aluminium market and began to
reflect wider financial trends.
As industries and markets began to recover following the
crisis, the rising demand for aluminium was not seen in
the LME price. Instead, sellers started to push premiums as
a way of reflecting that demand, and the premiums
started to climb. These climbs were exacerbated by analysts
who were stuck in the old market and thought that the
high premiums were only a temporary blip.
With every LME rule change or market development came
the accompanying predictions that the high premiums
would disappear. Buyers took these predictions to heart
and held off buying, only to see premiums skyrocket again
as they were forced to cover volumes in the short term.
The MB premium hit $300 per tonne for the first time in
January 2013. It went through $400 per tonne in May the
following year on its way to breaking $500 per tonne that
September. The modest, consistent logistical cost premium
that had accounted for perhaps 5% of the cost of
aluminium had been replaced with a volatile, demand-
driven market premium that was making up about a
quarter of the aluminium cost.
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Although premiums have fallen heavily in the last year,

this was in response to high supply levels and not an
unwinding of the abnormal premium structure that
analysts predicted several years ago. What the LME price
and the MB premium reflect has not changed this year. The
LME price is still not the aluminium price. The LME price
plus the MB premium is the aluminium price.
Naturally, companies will look to pass this expense
through to customers. Producers, then product producers,
and now fabricators are obliged to pass on this extra cost.
Premiums have already made this journey in the
automotive sector, running from aluminium producer
through to rolling mill or casting house, to original
equipment manufacturer and eventually to carmaker.
Premium prices
Metal Bulletin’s price reporters track and assess a wide
range of premiums for aluminium in locations across Asia,
Europe and the Americas for use by its subscribers. These
premiums are assessed from our offices in London, New
York, Sao Paulo, Shanghai and Shanghai, which means our
reporters are closely acquainted with the markets they are
covering.
A complete list of our global aluminium premiums, and the
monthly averages that we publish ourselves, follows on
the next page.

The total cost of aluminium has not risen - it is just

structured differently. Where contracts in the past
stipulated a number based on the LME aluminium price,
now they must also incorporate the MB premium as an
equally fundamental aspect of the final pricing terms.

Part of the Metal Bulletin ‘2016 Survival Kit’ series

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Aluminium premiums by specification

Asia: spot and contracts
Aluminium P1020A, cif main Japanese ports, quarterly, $/tonne Quarterly
Aluminium P1020A, cif main Japanese ports, spot, $/tonne Weekly
Aluminium P1020A, cif main Japanese ports, spot low-high, $/tonne Key price Weekly
Aluminium P1020A, in-warehouse Johor, spot, $/tonne Weekly
Aluminium P1020A, in-warehouse Johor, spot low-high, $/tonne Weekly
Aluminium P1020A, cif Shanghai, spot, $/tonne Weekly
Aluminium P1020A, cif Shanghai, spot low-high, $/tonne Weekly
Aluminium P1020A, in-warehouse Singapore, spot, $/tonne Weekly
Aluminium P1020A, in-warehouse Singapore, spot low-high, $/tonne Weekly
Aluminium P1020A, in-warehouse S Korea (Gwangyang or Busan), spot low-high, $/tonne Weekly
Aluminium P1020A, in-warehouse S Korea (Gwangyang or Busan), spot, $/tonne Weekly

Asia: monthly averages

Aluminium P1020A, cif main Japanese ports, spot monthly average, $/tonne Monthly average
Aluminium P1020A, in-warehouse Johor, spot monthly average, $/tonne Monthly average
Aluminium P1020A, in-warehouse Johor, spot low-high monthly average, $/tonne Monthly average
Aluminium P1020A, cif Shanghai, spot monthly average, $/tonne Monthly average
Aluminium P1020A, cif Shanghai, spot low-high monthly average, $/tonne Monthly average
Aluminium P1020A, in-warehouse Singapore, spot monthly average, $/tonne Monthly average
Aluminium P1020A, in-warehouse Singapore, spot low-high monthly average, $/tonne Monthly average

Europe: spot premiums

Aluminium 6063 extrusion billet, in-warehouse Rotterdam duty-paid, spot $/tonne Key price + forecast Twice weekly
Aluminium P1020A, in-warehouse Rotterdam duty-paid, spot $/tonne Key price Twice weekly
Aluminium P1020A, in-warehouse Rotterdam duty-paid, for delivery three months forward, $/tonne Twice-weekly
Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, spot, $/tonne Daily
Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, spot high-low, $/tonne Daily

Europe: monthly averages

Aluminium P1020A, in-warehouse Rotterdam duty-paid, monthly average $/tonne Monthly average
Aluminium P1020A, in-warehouse Rotterdam duty-paid, for delivery three months forward, $/tonne, monthly average Monthly average
Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, $/tonne, monthly average Monthly average
Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, high-low, $/tonne, monthly average Monthly average

Americas: spot premiums

Aluminium P1020A, delivered US midwest, spot, $/lb Key price + forecast Weekly
Aluminium P1020A, cif Brazilian main ports duty-unpaid, spot, $/tonne NEW! Fortnightly
Aluminium P1020A, delivered Sao Paulo region, spot, $/tonne NEW! Fortnightly

Part of the Metal Bulletin ‘2016 Survival Kit’ series

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Metal Bulletin Special Report | Aluminium Premiums
FAQs
What is Metal Bulletin?
Metal Bulletin is an independent service that provides
news and prices for producers, consumers and traders in
the metal market, as it has done since it was established in
1913. Its journalists carry out these functions from offices in
London, New York, Singapore, Shanghai and Sao Paulo.
Metal Bulletin is owned by Euromoney Institutional
Investor plc, one of Europe’s largest publishers of business
and financial information, which is listed on the London
Stock Exchange.
What are Metal Bulletin’s
aluminium premiums?
Metal Bulletin assesses premiums for aluminium ingot and
billet in a range of global locations. These include in-
warehouse Rotterdam duty-paid and duty-unpaid, cif
main Japanese ports, cif main Brazilian ports, cif South
Korean ports, cif Shanghai, in-warehouse Singapore, in
warehouse Johor and delivered US Midwest. Metal Bulletin
also assesses premiums for billet on an in-warehouse basis
in Europe and a cif main Brazilian ports basis.
The numbers published are Metal Bulletin’s assessment of
a representative figure for the premium over London Metal
Exchange cash prices based on transactions, bids, offers
and appraisals gathered from buyers and sellers.
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How does Metal Bulletin
discover these premiums?
Metal Bulletin polls each of these markets at a defined
frequency to gather details of transactions, bids, offers and
assessments for material that matches the clear
specifications that it publishes. This polling is open to
anybody active in a specific market.
Metal Bulletin attempts to speak to participants from across
the supply chain: from producers through traders to
consumers. Based on the details that a Metal Bulletin
journalist gathers, she or he will publish an assessment of
a representative premium.
Before it is published their data and assessment is
reviewed by one of their peers and then approved by a
senior journalist.
But what do you actually
ask people?
Metal Bulletin asks for prices, volumes, delivery and
payment terms and any special circumstances that are part
of a purchase or sale from the over 100 contacts that have
contributed to our global aluminium premium assessments
since the start of 2015.
In addition, we ask companies to explain what drove
particular purchases or sales, and seek to always have a
clear overview of what the driving factors are in any given
market on any given day.
Any pricing data collected from market sources is kept fully
confidential and stored in secure servers within Metal
Bulletin’s password protected pricing database which is
accessible only to the authorised editorial staff.
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Can I or my company
contribute to the premiums?
So long as you are active in the market we would welcome
your involvement. Contact editor Alex Harrison,
aharrison@metalbulletin.com, in the first instance.
How can I know the premiums
are representative?
Metal Bulletin publishes a log of some or all of the trades
that it gathers to enable users to see the details of business
on which the key premium assessments are based. In
addition, Metal Bulletin reserves the right to question and
exclude numbers that appear to be outliers. It may also
require verification of certain deals in the form of contracts,
emails or confirmation from a counterparty.
Metal Bulletin’s pricing reporters abide by a code of conduct
and there is a clear procedure in place for the correction of
prices and for complaints about particular prices.
How does Metal Bulletin ensure
best practices and integrity of
its pricing?
Metal Bulletin pricing procedures align with the IOSCO
standards for Price Reporting Agencies. Adopting the best
practices promoted by IOSCO, Metal Bulletin has launched a
new state-of-the-art pricing database system which
ensure that full audit trails, adequate record reeking (full
confidentiality of input data is maintained), and senior
staff oversight of the pricing process are observed any at
each pricing session.
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How do companies use
premiums in their businesses?
The prices and premiums that Metal Bulletin publishes are
used in a wide variety of ways. Companies that are
considering entering the spot market to buy or sell use the
numbers that Metal Bulletin produces as a guide for
negotiation, for example.
Senior managers also use the prices internally as an
independent guide to the performance of their sales or
purchasing teams.
Banks and insurers base the valuations that they carry out
for a variety of purposes on prices published by Metal
Bulletin as well.
The prices and premiums are used as the basis for the
settlement of term contracts between counterparties
looking for an independent arbiter of price levels in the
spot market over a certain period of time.
The prices are also required by those that buy material
whose input costs are derived from a formula linked to the
numbers published in Metal Bulletin, to verify the charges
made by their own suppliers.
How do I get hold of
the premiums?
The weekly newsletter of all the aluminium premiums that
Metal Bulletin assesses across the globe is published every
Monday morning.
Existing Metal Bulletin subscribers can also receive the
aluminium premiums newsletter, free of charge, by
altering their account preferences here. Simply go to
‘Closing Prices and Premiums’ and tick ‘Weekly Premiums –
Aluminium’.
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Forecasts from Metal Bulletin

What’s the forecast for
aluminium premiums?
As the aluminium premium is now considered to be a
fundamental part of the final pricing of aluminium, the
importance of analysing premiums has risen.
It is now crucial to understand what affects these
premiums, both currently and in the future. Metal Bulletin
Research (MBR) provides market analysis and forecasts for
aluminium premiums. Not only does it forecast what
premiums will be in the quarter to come, it also provides
transparency to these forecasts with explanations of the
market forces driving the premium.
What market forces are
relevant now to the future
How does Metal Bulletin
Research forecast aluminium
premiums?
Rather than just presenting a forecast premium price, MBR
lays out the analysis behind the forecast.
Each issue of MBR Aluminium Weekly Market Tracker
features a premium forecast table, with the analysts’
opinions on the outlook for both premium direction and
absolute levels over the next quarter. Bullish factors and
bearish factors that affect premiums are listed, with
suggestions on these factors and their relative strength to
each other in order to make our premium forecast
judgments. We also include a premium forecast chart
which shows historical premium/LME price information and
quarterly forecasts for the next year.

level of aluminium premiums? To find out more contact M_Higgins@metalbulletin.com

or call +44 (0) 20 7779 8710
In general, MBR believes there are a series of factors that
will affect the direction for premiums. The underlying
supply/demand balance will have the most direct impact
on premium direction, but also any change in the interest
rate and shift in the shape of the aluminium forward
curve, as these factors can affect the financing deals’
profitability, which can further weigh on aluminium
premiums. Chinese exports can take their toll on the ex-
China supply/demand balance which further affect
premiums – metal availability will increase if lower-cost
Chinese producers continue to export as they find it
difficult to sell into the oversupplied domestic market.

Part of the Metal Bulletin ‘2016 Survival Kit’ series

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Metal Bulletin Special Report | Aluminium Premiums
Editor's choice articles on
Aluminium Premiums:
Q1 MJP aluminium premium
talks begin at $120 per tonne
A major aluminium smelter has offered Japanese
traders and end-users a premium of $120 per tonne
for the first quarter of 2016, according to sources.
This would indicate a 33% jump from a premium of $90
per tonne for the fourth quarter this year but a 72% slump
in premium from first quarter 2015 of $425 per tonne.
Market participants are expecting the first-quarter 2016 MJP
premium to be settled at a lower level than the offered
number by the major producer.
“Our previous expectation was that the Q1 premium would
be settled at $85 per tonne, but we are now expecting to
see $90-95. After all, premiums are on a rise in Europe,
while inventory has been decreasing in Japan,” a market
source involved in the negotiations said.
“Smelters all tended to provide high offers at the very
beginning, but the final range still depends on how main
Japanese clients bargain,” a major Japanese trader said.
Part of the Metal Bulletin ‘2016 Survival Kit’ series
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For the fourth quarter, major aluminium producers started
by offering Japanese customers premiums of $100-110 per
tonne, and ended up settling at $90 per tonne.
“We have heard the offer of $120, which is higher than
expected. We think the premium is likely to get settled
between $100-120 per tonne,” another major Japanese
trader said.
A third Japanese trader shared the same view, saying “the
offer is a bit too high.”
The Asian quarterly benchmark talks are still ongoing and
market participants said they are expecting the first quarter
premium to be settled in early December
Linda Lin
linda.lin@metalbulletinasia.com
Location: Shanghai
This article was first published in December 1, 2015
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US Midwest premium rises to

6-month high
The Midwest aluminium premium has yielded another
bump following the Thanksgiving break, reaching its
highest level in more than six months.
Metal Bulletin sister title AMM’s assessment of the spot
P1020 premium rose to 8.75 to 9 cents per lb from 8.5 to
8.75 cents per lb previously. The premium last topped this
level on May 27, when it was at 9.75 to 10 cents per lb.
The premium has seen steady increases from this year’s
low of 6.75 to 7.25 cents per lb at the end of September,
driven largely by supply concerns sparked by smelter
curtailments by Alcoa Inc. and Century Aluminum Co.
However, suppliers believe that increases in the premium will
begin to taper as 2015 draws to a close, they said this week.
“I don’t think it’s going anywhere, even with this
reduction of capacity. If we lose a lot of production here, it
might go up a penny or two,” one supplier source said.
Aluminium prices on the LME have generally continued to
languish below $1,500 per tonne since finding a new six-
year low in late November. The LME’s three-month
aluminium contract closed the official session at $1,469 per
tonne (66.6 cents per lb) on December 3.
Even with the slight uptick in the premium, business has been
somewhat sluggish, the second supplier said, a trend that will
contribute to the premium levelling off. “I can use a little
more business,” he said. “I think the volumes are not great; I
don’t think there will be much change [to the premium].”
This report was first published by American Metal Market
editorial@metalbulletin.com
Location: New York
This article was first published in December 4, 2015

“I think people are waiting for [London Metal Exchange]

prices to drop a little more, nobody is in a hurry to buy,” a
second supplier said. “I think that’s human nature: when
prices have gone down in the past, people think it’s going
to continue.”

Part of the Metal Bulletin ‘2016 Survival Kit’ series

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2016 presents a mixed picture

for European Al premiums
European aluminium premiums are stable and likely “Autos are driving the good news in primary foundry alloys
to remain that way into the first quarter of 2016, but – we expect a 5-7% increase in automotive castings
there are mixed views as to their fate beyond that. demand,” a producer said.

Metal Bulletin’s European duty-unpaid aluminium
premium stands at $105-125 per tonne, while the duty-
paid number is $155-180. The midpoints of both premium
ranges are well supported this week, though spot business
is slowing ahead of the end of the year.
Market participants expect premiums to remain at current
levels or even poke up a little into the first quarter, and
consumers are now booking first-quarter supply deals with
fixed-rate premiums. European premiums have been rising
over the past two months on nearby tightness, and that is
expected to carry into about the middle of the first quarter
of next year.
Beyond that, however, there is no consensus as to where
the premiums will go. Until recently, most market
participants would have said that premiums will fall, as
the global oversupply will eventually tell in Europe. Most
supply deals for 2016 beyond the first quarter have
floating-rate premiums as consumers forecast lower
premiums ahead.
But weak spreads in the first quarter could encourage
metal holders to exit positions, putting their material onto
the market and depressing nearby premiums.
“Why would you hold stocks when the spreads are so
bad?” a second trader said.
LME aluminium spreads are notoriously volatile, however,
and could become more favourable to financing activity in
a very short time.
Jethro Wookey
jwookey@metalbulletin.com
Twitter: @jethrowookey
Location: London
This article was first published in December 8, 2015

But now that is being challenged, with some market

participants expecting Europe’s tightness to continue
beyond the first quarter. Some traders have reported
requests this week for fixed-rate premiums on 2016 deals
beyond the first quarter.

“I’ve never seen so many mixed views for 2016 – it’s half
bearish and half bullish,” a trader said. “Some people
think China will export a lot next year, and some think
China won’t export because LME prices are too low.”

If the tightness in Europe does continue beyond the first

quarter, premiums could rise as volumes are expected to
be strong in 2016, particularly in the automotive space.

Part of the Metal Bulletin ‘2016 Survival Kit’ series

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Metal Bulletin Special Report | Aluminium Premiums
Al premium contracts go untraded
– a victim of the LME’s success in
tackling queues
The London Metal Exchange’s new aluminium premium
contracts remain untraded two weeks on from launch,
but the lack of interest in the contracts is a testament
to the belated success of the LME’s warehouse reforms,
Metal Bulletin’s Mark Burton argues.
When, in April last year, the LME first looked at launching
contracts that would allow the physical market to hedge
aluminium premiums, it recognised that if its warehouse
reforms went to plan, the market might not have much
need for premium contracts.
In its ideal world, the LME would be successful in its efforts
to reduce queues in the LME warehouse system, and the
industry’s need for a hedge against the highly inflated
premiums seen at the peak of the warehousing crisis
would be greatly diminished, because if the queues did
not exist, neither would the exorbitant premiums.
But, in 2014, with a lawsuit brought by Rusal (in December
2013) about its proposed reforms hanging over the LME, the
exchange could not say with certainty when it would
achieve its goals, and as a result, it viewed premium
contracts as a useful interim solution.
“Given the likely timescale for queues to diminish at LME
warehouses [including the potential for legal delays] a
premium hedging contract may be of assistance to the
market in respect of queue-based premiums until such time
as queues have been managed down by LME rule-making,”
the exchange said in a notice to members at the time.
The LME also figured that, beyond that point, the contracts
could prove useful as a hedging tool in a post-queue,
low-premium environment, and so it pushed ahead with
the development of the contracts.
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But two weeks on from their launch in November 2015,
the lack of activity in the premium contracts suggests that
they could prove to be a resounding failure, precisely
because the LME’s rule-making, belated and delayed
though it has been, is proving to be a resounding success.
Some brokers have received enquiries about the contracts,
primarily from physical traders, but so far none of the four
regional contracts has traded since launch on November 23,
and were it not for the price discovery services provided by
LME floor traders, the quoted prices for some of the
contracts would be embarrassing for the exchange.
For example, an order placed on Select on December 2
established a $5/400 bid-ask spread in the European
premium contract, which was quoted at $120 at the time.
Five days on, no one outside of the LME Ring has made a
better market.
Even on the floor, the $110/140 bid-ask spread on the
Western Europe premium is indicative of the lack of depth
in the market, despite incentives including an introductory
trading fee waiver and market-making rebates.
Things may change, but after a fortnight’s existence, it
appears that the contracts are attracting little interest
because, fundamentally, they are designed to provide a
solution to a problem that no longer exists.
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Contracts born of circumstance
The LME began looking at launching premium contracts to
offer a hedge against then-record-high premiums in April
last year, shortly after the UK courts forced it to launch a
new consultation on its warehouse reforms, thereby
delaying their imminent introduction.
Consumers had asked for the contracts because of a
growing unhedgeable basis risk between the LME flat price
and the all-in cost of buying aluminium, and in the
months leading up to the end of last year, their needs only
grew, as premiums rocketed and the unhedgeable portion
of the all-in aluminium price rose to nearly 25%.
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However, in December 2014, the UK Supreme Court threw
out Rusal’s claim for an appeal against an earlier ruling
that had found in favour of the LME, thereby ending the
year-long suit and enabling the LME to introduce its
broader suite of tools to tackle the warehouse queues.
The fall in premiums that followed was as precipitous a
drop as one is likely to see in the metals markets: in less
than four months, the MB duty-unpaid Rotterdam
aluminium premium had declined from more than $400
per tonne to less than $100, and the unhedgeable portion
of aluminium buyers’ purchasing costs had dropped to
about 5%, as the chart below illustrates.
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By making it impossible for warehouses to build new
queues of more than 50 days, and forcing warehouses
with existing queues to load out more units than they load
in, the LME transformed the ability and willingness of
warehouse companies to offer large incentives to fill up
their sheds.
As a result, the warehouse bid previously available in
locations such as Detroit and Vlissingen collapsed, and
premiums followed suit. So too did the length of the
queues in those locations, as the LME’s monthly warehouse
queue data shows.
At the end of October, the queue to withdraw aluminium
from Pacorini sheds in Vlissingen had shrunk to 311 days,
down from 683 days in April last year, while the backlog
in Metro’s Detroit warehouses had fallen from 683 days to
236 days.
And with the planned introduction of queue-based rent
capping and increased load-out rates next year, the LME
has engineered further incentives for those warehousing
companies to get on the right side of the 50-day queue
limit sooner rather than later.
The legacy queues at Detroit and Vlissingen will persist for a
little while longer, but their sting has now been well and
truly drawn by the LME’s twelve-item package of
warehouse reforms.
Already, and perhaps most crucially for the LME’s
reputation, LME prices and all-in prices have started to
converge, and market participants are behaving as the
exchange imagined they would in the post-queue
environment they were imagining back in April last year
when they started looking seriously at launching the
premium contracts.
Proof of the fact that the LME is finally putting the issue to
bed can be seen in the collapse in premiums and queue
lengths. Over the past two weeks, it has also been plain
to see in the moribund trading activity in the new
premium contracts.
Of course, the LME may be right: the industry may find it
useful to be able to hedge aluminium premiums in a post-
queue environment.
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As the chart above illustrates, the percentage of the
premium relative to the all-in price has risen again over
the past few months as premiums have rebounded on
regional supply tightness, and, if the trend continues,
consumers and traders may well look to the LME to hedge
against it.
Some contracts can be slow to gain traction, but even
without the usual liquidity problems associated with new
products, there are also a number of peculiar obstacles
on the contracts’ launch runways that may end up
keeping them on the ground, broker and trade sources
told Metal Bulletin.
Contractual quirks
First, the fact that there are four regional contracts will
exacerbate issues with trading liquidity and heighten concerns
about low levels of open interest, some brokers said.
Second, while the contracts are regional, they still do not
offer a precise hedging solution for consumers in the four
markets they cover.
In Western Europe, for example, the regional premium
covers LME warehouses in Belgium, the Netherlands and
Germany, but not those in the UK or Italy.
As a result, the contracts may not precisely cover the costs
of purchasing for consumers in countries in northern or
southern Europe that may be considering using the
contracts for hedging purposes.
And for market participants looking to settle the
contracts physically by delivering to or withdrawing from
the LME’s warehouses, the contracts may also prove
frustratingly imprecise.
For example, a consumer who buys the Western Europe
contract with the hope of picking up aluminium in
Antwerp may end up obtaining a warrant for metal in
Hamburg, 550km away from the desired location.
Consumers would also have no visibility over which brand
or form of aluminium they would receive, which could
further reduce the attractiveness of the LME’s new contract
as a means of facilitating the physical production,
consumption and trading of aluminium.
 Special Report
Metal Bulletin Special Report | Aluminium Premiums
However, this may prove to be a blessing in disguise, as
the imprecision in physical settlement outlined above
could help to forestall a third problem that may otherwise
threaten the contracts’ chances of success.
That problem is that, in theory, the contracts threaten to
disintermediate certain brokers who are already trading in
the over-the-counter warrant market by bringing the
trade in warrants on to the exchange.
The concentration of stock in Detroit and Vlissingen that
occurred as aluminium and other metals gravitated
towards the back of the queues in those locations did great
damage to the OTC warrant trade, by making it more costly
and less rewarding to sift for the greatly reduced number
of valuable warrants available in clearing.
As the queues dissipate, the geographical concentration of
stock should become less severe as well, and warrant
traders will welcome the prospect of a newly liquid and
regionalised trade in LME warrants. It is difficult to see why
they would want their clients to start trading those
warrants directly on Select, rather than via the broker-
mediated phone market.
Thankfully for those brokers, the uncertainty surrounding
brands and warehouse locations inherent in the premium
contracts’ settlement procedure may help to ensure that
traders looking to pick up aluminium warrants continue to
do so via the well-established OTC channels.
High margins
As a fourth and final obstacle, there is also the fact that if
an LME client wants to trade the premium contracts, they
need to post initial margins equal to as much as 95% of
the underlying value of the contract.
Initial margins for the Southeast Asian premium contract,
for example, are $86 per tonne, compared with a contract
value of $90 per tonne.
Part of the Metal Bulletin ‘2016 Survival Kit’ series
15
Copyright © 2002-2015 Metal Bulletin
High margining requirements may not cause major
problems, given the professional and well capitalised
nature of the industry the contracts serve, but brokers
contacted by Metal Bulletin have nevertheless been
scratching their heads about why they are so high, and
struggling to justify the margins to their clients, who are
used to posting initial margins equal to about 10% of the
value of the underlying contract.
The reason that they are so high is that in setting the
margin requirements for the contracts, the LME had to factor
in the colossal rise in premiums that the queues in its
warehouse caused, and the vertiginous drop in premiums
that followed its package of reforms to tackle the problem,
as a source familiar with the contracts told Metal Bulletin.
The margins, in short, assume that the egregious volatility
in aluminium premiums caused by the queues could
happen again, and do not take into account the fact that
the LME’s rule making has made a repeat of the
warehousing crisis virtually impossible.
This final quirk will not sink the contracts, but the high
margin requirements do serve as a symbolic reminder that
the premiums contracts were primarily designed to fix a
major aberration in the structure of aluminium pricing
that, thankfully for the LME’s reputation and the wider
aluminium market, no longer exists.
Mark Burton
mburton@metalbulletin.com
Twitter: @mburtonmb
Location: London
This article was first published in December 9, 2015
 Special Report
Metal Bulletin Special Report | Aluminium Premiums
HOTTER ON METALS: Aluminium
spreads ease as long gives back
some of its position
It has been an interesting week for the aluminium market,
with financing banks getting tougher and a major long-
position holder giving back some of its position.
Both situations have fuelled several theories, leaving a
blurred picture of what is going on.
One common factor, however, is the role that regulatory
oversight is playing in commodities markets.
For starters, several financing banks have told their clients
that they are comfortable financing only warrants stored
officially on the London Metal Exchange.
While this is not an entirely new phenomenon – on-
warrant material is insured and easier to trade – the
more-cautious approach being adopted by financing
banks comes at the same time as their compliance
departments step up scrutiny of their counterparties.
It’s hardly a surprise, given the number of large
commodities merchants, traders and banks that have been
roiled by internal trouble or reorganisation in the past
several months.
Add to the mix the sharp decline in aluminium premiums
since the start of the year and the losses being registered
by market participants, and it’s no wonder that the
appetite for financing is declining.
With some financing banks offering funding only if
material goes on-warrant, about 70,000 tonnes of
aluminium has been moved on-warrant in Rotterdam in
two tranches so far this week, market participants say.
To read all the latest articles and updates on Aluminium Premiums visit:
www.metalbulletin.com/alpremiums
Part of the Metal Bulletin ‘2016 Survival Kit’ series
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It isn’t a move common to all financing banks; there are
still places to secure finance for off-warrant metal.
The other major development this week has been the
move by the long, a major bank player, to give up some of
its January 2016 position.
Market participants say the long has been letting material
go at valuation without a fight, with one short-position
holder in particular benefiting.
Contrary to the current trend, this bank is unlikely to be
coming out of the LME business. But senior management
always have an eye on their peers, and are likely to have
taken note of the closure this week of Morgan Stanley’s
LME trading desk.
There has been speculation for some time that the long
has been facing scrutiny from a combination of the LME
and UK regulator the Financial Conduct Authority, as well
as its own compliance department, as a result of its
aluminium exposure.
Equally, the long-position holder might just have decided
to trim its position ahead of the year-end and book the
profit in its P&L.
Andrea Hotter
ahotter@metalbulletin.com
Twitter: @andreahotter
Location: New York
This article was first published in December 11, 2015