The aluminium market is perking up, with the average price per tonne on the London Metal Exchange rising to over USD 2,000 now from USD 1,693 in February 2014. While the primary reason for this is high physical delivery premium, the supply demand dynamics are also brightening.
This is due to a long waiting period and a court battle looming over the metal, owing to warehouse rules on delivery. In the last few years, warehouses registered with the LME were witnessing bottlenecks after metals such as aluminium were used as a financing tool.
Now, over ten million tonnes is estimated to be stored in the LME warehouses, split equally between official warehouses and unofficial ones. Fitch believes that around 60% to 70% of the stocks are tied up in commodity financing transactions.
To reduce warehousing logjams, the LME, late last year, formulated stricter regulations. These rules, which were to have taken effect from April 1st 2014, were expected to cut the waiting time for metal delivery. But, aluminium producer Rusal had raised objections and the London High Court halted LME’s new warehouse rules from taking effect. The ruling has fuelled a further increase in premiums.
While it is unclear when and how the premium correction scenario would unfold in an orderly way over time or a disorderly correction if a settlement is reached it is certain that premiums will see a reduction.
Source – Business Line