Frost & Sullivan perspective on global aluminium prices

Over the last 5-6 years, aluminium LME prices have crashed from levels of US $3,000 per metric tons (MT) to the current rate of around $1,700-1,750 per MT. Due to this, the smelters were hard hit as the cost of production increased on one hand, and LME prices was declining on the other. As a measure to safeguard the producer margins, the "premium over LME" for aluminium gained significance. Premium components like Main Japan Port (MJP) and Mid West Transfer Premium (MWTP) that were added above LME prices have risen from $70-80 in 2010 to approximately $350-375 in March 2014.

Factors such as capacity constraints due to smelter shutdown, increase in cost of production etc., were quoted as reasons by downstream players to artificially raise the smelter selling prices. Due to this increase, smelters were able to nullify the LME prices decline to some extent. However, it impacted the downstream aluminium products manufacturers as they found it difficult to pass on the increase in "premium above LME" to end customers.

The aluminium downstream industry urged LME to address this situation and bring transparency in aluminium selling prices. In this regard, LME brought in changes in its warehousing/logistics policies and regulations last year, such as reduction in the loading-in queues from 100 days to less than 50 days. By these changes it envisaged to reduce the premium above LME. Following this, UC RUSAL, the world's leading primary producer of aluminium filed lawsuit against LME, requesting for postponement of the implementation of this policy. The judgement delivered in first week of April, 2014 was in favour of UC RUSAL. This means that the opacity in premium fixation of aluminium selling price would continue and premiums are not expected to decline in the short term.

The aluminium downstream industry presently has to bear the high premium on aluminium base metal until further notice. LME on the other hand is seeking legal consultation to counter this judgement and to explore other options. But, the aluminium downstream industry would have to brace itself for some more time until more clarity emerges on transparency in premiums as well.

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