Aluminium industry at odds over supply deals, warehouse reforms – by Emma Farge (Reuters U.S. – September 18, 2013)

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GENEVA, Sept 18 (Reuters) – The world’s top aluminium producers and consumers are at loggerheads over the thorny issue of what price, or premium, should be paid to secure metal deliveries, and will conclude fewer fixed term supply deals this year, industry sources said.

Producers Rusal , Alcoa and Rio Tinto are descending on Geneva for an industry gathering that marks the start of annual supply negotiations with aluminium product makers.

But unlike in recent years, top consumers like Novelis and Rexam have a strong hand to play thanks to U.S. regulatory scrutiny into claims big banks and trade houses artificially inflated aluminium premiums by building backlogs at London Metal Exchange (LME) warehouses. The scrutiny comes alongside a proposed overhaul of warehouse practices on the LME, which has already helped knock European spot premiums down some 20 percent off a June record high near $300 a tonne.

“I’m sure term premiums will be lower than $230-250 a tonne,” said a source who represents consumers. “Producers are getting nervous about the implementation of LME warehouse rules (and) I think most consumers are going to continue to live hand to mouth because they think the premiums are going to come down further.”

In a bid to tackle year-long aluminium warehouse backlogs blamed for inflating premiums, the LME has proposed that as of next April, warehouse companies with wait times of over 100 days must load out more metal than they take in.

The proposal will be voted on this October, but industry players expect it to be approved given all the U.S. regulatory scrutiny, and given the LME is itself a co-defendant in private U.S. lawsuits brought on by consumers.

“If anything, the risk is that the (LME rule) change may be more substantive, and there’s no doubt it will have a bearing on premiums – who would want to commit with all this uncertainty hanging over the market,” said Macquarie analyst Duncan Hobbs.

Premiums are paid over the LME cash price to cover physical delivery costs, but they also reflect changes in supply-demand dynamics, like increased metal availability as a result of reduced backlogs at LME warehouses.

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