Rising aluminum inflows to Europe to cap prices

Reuters reported that increasing shipments of aluminum are likely to arrive in European ports and limit the potential for price rises as financing deals for storing the metal lose their lustre.

Financing deals, many made by banks and trading houses in the aftermath of the credit crunch in 2008 locked metal up in long term rent agreements in which storage and financing costs fall well below the rising market price of the metal.

Traders said that with signs of a recovery in the United States and Europe however cheap money is not expected to last and new deals have dried up eroding a key plank of aluminum demand.

So far there has been no big hit to benchmark prices on the London Metal Exchange nor to premiums for physical material, because the glut of locked up stock has been no secret. But steadily rising free stocks may add incremental pressure to prices and puncture the premiums.

Analyst Ed Meir of MF Global said that it's going to cap gains. If these financing deals were not so prevalent, all this material would be sloshing around the market and we wouldn't be as high as we are. Given that we've earmarked a whole chunk of metal into these deals it's keeping prices relatively firm. As the metal you would think there would be some downside pressure on prices.

Deutsche Bank last week estimated that 4 million tonnes to 4.5 million tonnes of aluminum were off exchange. This is around 10% of the roughly 42 million tonne market. Since the start of the year, global LME bonded warehouse stocks have surged by 250,000 tonnes or nearly 6%. The figure is just a few percent from record highs of 4.64 million tonnes hit one year ago.

Traders said that there is little chance that locked-up material will flood the market just yet after many of these rent deals have been rolled over or extended. But surplus material coming out of smelters will now move on to exchange.

Analyst Mr Will Adams of FastMarkets said that financing deals have held the market tight and kept premiums high has encouraged production. If we're going into an environment where interest rates rise then the opportunity costs of putting metal into these financing deals is going to increase as well.

（Sourced from Reuters）