Aluminum Stocks to Gain in 4th Quarter as Deals Extend, CRU Says

Aluminum stockpiles monitored by the London Metal Exchange are expected to gain in the fourth quarter as the so-called financing deals are extended, researcher CRU said.

Premiums paid for aluminum in North America and Europe may decline slightly in the coming months because of weaker demand, while staying at elevated levels because financing deals limit supply of the physical metal, according to CRU. Premiums in North America rose to a record in May after warehouse incentives and transportation costs climbed.

“I would expect in the fourth quarter we will see more inflows into the LME warehouses,” London-based CRU analyst Marco Georgiou said by phone yesterday. “We don’t see much metal coming out of the warehouses, which is usually a reasonable sign it’s in safe hands. At the moment I see the larger banks continuing this activity for the foreseeable future.”

Aluminum inventories, little changed since Sept. 30, have gained 6.9 percent this year after surging more than fourfold in three years through 2010 as low borrowing costs made financing deals more attractive. They declined 7.6 percent last year. As much as 85 percent of the aluminum stockpiles are locked in the so-called financing deals and unavailable to the market, according to United Co. Rusal, the world’s biggest producer.

The Midwest premium fell to about 8.1 cents a pound from between 9 and 9.5 cents a pound in May, and will likely stay at about 8 cents a pound, “supported by the warehousing activity in the region,” Georgiou said. The premiums are added to the price of aluminum for immediate delivery on the London Metal Exchange.

Premiums in Europe, which stayed “flat” over the past three months at $125 to $130 a metric ton, duty unpaid, will likely stay in the range of $120 to $125 a ton in the fourth quarter, according to CRU.

European Demand

“It really depends how demand will shape up in the fourth quarter in Europe,” Georgiou said. “We are expecting weaker demand, and weaker demand normally implies lower premiums. But warehousing deals continue, and that still lends support to the premium level.”

Canceled warrants, or orders to draw the metal from the LME stockpiles will probably decrease in the fourth quarter as demand weakens, particularly in Europe, Georgiou said.

Stockpiles in Detroit, which holds 58 percent of U.S. inventory, are up 25 percent this year. They increased by 21,200 tons to 1.18 million tons yesterday. The U.S. accounts for about 45 percent of global stockpiles monitored by the LME.

Stockpiles

Aluminum stockpiles in Europe, where 36 percent of the global inventory is located, are up 51 percent this year on an 11-fold increase in the Dutch city of Vlissingen, the second- biggest repository tracked by the LME and owned by Glencore International Plc.

A financing transaction involves a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery dates trade at higher prices than nearer-dated metal. Financing costs and expenses for storing metal influence profits on the transactions.