Aluminium premiums in Europe seen stabilising after rise

Surcharges for physical aluminium in Europe levelled off after recent gains and may come under pressure from additional supply if Chinese exports rebound and some inventories are liquidated.

The surcharges, or premiums, which consumers pay on top of the London Metal Exchange (LME) cash price for immediate delivery of metal, have gradually climbed over the past couple of months amid tighter availability. European premiums were quoted at $160-$170 a tonne for duty-paid material in Rotterdam, recovering from $115-$135 in September and from a peak of $500 in November 2014.

"They're (premiums) just starting to come under pressure. For the rest of the year, we see them coming down slightly," a European trader said.

The rise in premiums was partly driven by a fall in imports of aluminium from China, traders said. Chinese exports of semi-finished products fell by 11 percent in September to 300,000 tonnes. The rise in premiums, however, may boost profitability of Chinese exports and increase those flows.

"The higher premiums go, the more incentive the Chinese have to resume shipments, probably capping them (premiums) for now," said analyst Michael Widmer at Bank of America Merrill Lynch in London.

Weaker contango

A weaker LME contango was also weighing on premiums, traders said. The contango - when forward prices are higher than nearby ones - of the LME December 2016 aluminium contract to three month aluminium has slid to $37.50 a tonne from $54 over the past three weeks.

That slashes profits for investors seeking to put in place finance deals in which metal is sold forward and then stored in LME warehouses. This can lead to more metal ending up on the market instead of locked up in warehouses.

"There had been more people financing metal again, which was supporting premiums, but with the contango coming in there's always the risk of some more pressure," another trader said.

Any decline in premiums would likely be modest since there were also supporting factors, such as the announcement earlier this month by US producer Alcoa that it would slash annual capacity by 500,000 tonnes.

US premiums have already climbed in response and European surcharges could also be bolstered if metal moves from Europe to help supply the United States. In the medium term, increased competition among warehouses following LME reforms to its warehousing rules may also help bolster premiums by ensuring more metal remains in storage.

"Paying incentives on the basis of queues has become more difficult (after LME reforms) and the result is that warehouses can compete on a more level footing," Widmer said.

"The discussion was to what extent you would have metal being dumped onto the market and you just don't see that happening."

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