Outflow from these warehouses over the past month or so has taken the edge off premiums, although they still remain elevated.
Deliveries into Rotterdam rose by a massive 217k on the 18th of March, the largest daily increase in exchange history. It has been suggested that this is due to sale of JP Morgan's commodities unit to Mercuria, with off-warrant material at Rotterdam becoming visible.
Over the last month or so, the two prominent "affected" warehouses holding aluminium have seen cumulative inflows since mid-2013 narrow. This is important as this will define any additional load-out requirement under new LME rules.
At Vlissigen, if the current pace of load-outs is maintained till the end of March and no new metal shows up on warrant, then the cumulative inflow since 1 July will be ~27kt. This will have to be withdrawn over May - July in addition to the baseline of 3,000tpd.
At Detroit, the requirement look like it will be a little larger at ~33kt. But this is a large improvment from just a few months ago, with the jump in cancelled warrants suggesting more metal that were under finance deals is ready to exit the warehouse.
The appearance of 217kt at Rotterdam on-warrant perhaps speaks to some of the murkier aspects of
Aluminium finance deals. It seems likely that this metal was tied up in financing off-warrant at Rotterdam, with it potentially unwound as the metal changed hands.
In some ways, the attractiveness of these deals remain unchanged, with the contango in the curve remaining steep and financing costs low. A major stumbling block, however, is hedging the premium risk.
Warehouses outside of Vlissigen and Detroit don't generate the same revenues given queues are shorter, while these two warehouses don't look to be accumulating more metal.
Financing deals can certainly be done outside of LME warehouses, but for it to be a risk free trade, someone has to hedge the premium. Given they are currently very high and could come down quite a bit, there is likely to be caution into heading into these kinds of deals in the next few months.
