Aluminium prices and premiums pick up

Aluminium has rallied nicely over the last quarter, although cash-3m spreads have been much more up and down than the price.

This is interesting in the context of financing deals, which has been a large component of demand in the past few years and is currently tying up a large amount of stock.

The recent gyrations in the contango is in sharp contrast to the stability seen from July 2013 up until the end of March, which was also the initial consultation period for the LME load-out rules which were delay by the UK High-Court.

While "affected" warehouses are under no additional obligations at present, the Goldman-owned Metro warehouses in Detroit continue to load out metal anyway.  Cancelled warrants now account for almost 90% of metal at this location.

The story is different at the Pacorini/Glencore warehouses at Vlissingen, which continues to see inflows, albeit at a much slower rate than early April.

With the Ali contango more variable and with Metro warehouses appearing to be not interested in these deals regardless, the incentives for financing deals appear to have diminished.

In this context, its interesting that the premiums for delivery are very high in all locations.

Perhaps this is just a case of an aspect of the market that has yet to adjust to lower financing demand from affected warehouses.

But it also perhaps speaks to the improvement in manufacturing demand for aluminium as well. The latest earnings report from Alcoa puts the market deficit at almost 1million tonnes for 2014 given 7% demand growth and curtailments at smelters.

Stronger demand and a fall in absolute inventories means that there has been a small, but meaningful decrease in global aluminium inventories.  Furthermore, not all of this inventory is particularly liquid, supporting tighter spot markets.

Aluminium prices can't continue to rally with reckless abandon as slower supply growth is still key to the market deficit.  It also seems likely that the contango in Aluminium can't flip into a prolonged backwardation too soon, as that would see financing deals unwind at a more meaningful pace.

But market fundamentals do support better aluminium prices, with perhaps more upside at the expense of physical premiums.