* RUSAL expects to see tendency to “float” premiums
* Premium as a pct of underlying price has risen to 10-12 pct
* Spot premiums likely to continue rising next year
By Polina Devitt and Harpreet Bhal
MOSCOW/LONDON, Sept 13 (Reuters) - Russia’s RUSAL, the world’s largest producer of primary aluminium, could offer floating premiums in term supply contracts it negotiates with consumers for 2013, with both sides reluctant to set long-term deals as spot market premiums reach record highs.
Agreeing on a level for premiums - money paid over the benchmark London Metal Exchange (LME) cash price to secure physical metal - forms a part of annual contract negotiations between producers and consumers. The premium set by RUSAL will hold a lot of sway in determining other deals in Europe.
Record high spot market premiums for aluminium in Europe have become a bone of contention as annual negotiations in Europe begin this week, with consumers preferring to hold off on long-term deals due to the volatility and some producers reluctant to commit at current levels.
“We expect to see a tendency to have floating premiums related to the underlying commodity contract, where producers are able to fix the margin over cast house costs,” Steve Hodgson, RUSAL’s director of international sales, said in a presentation at a Metal Bulletin aluminium conference.
“This protects their own capital investment returns, whereas many consumers have thus far avoided these upfront risks.”
Hodgson said cash premiums over prices on the LME had risen to 10-12 percent of underlying prices. In the past, RUSAL had offered fixed premiums when the premium-to-price ratio was much lower.
Spot market premiums have soared to record highs as vast amounts of aluminium are locked away in financing deals in warehouses in places like the Dutch port of Vlissingen, the Malaysian port Johor and Detroit in the U.S., resulting in queues of up to a year to collect metal. So while there is a glut of the metal, it is not readily available.
“The fact remains that very little long-term contracts are being concluded because buyers are unhappy with the current levels and buying hand-to-mouth. They don’t want to commit at current levels,” a physical trader said, adding consumers would favour short-term deals as long as the volatility lasted.
“And some sellers don’t want to commit for more than three months either. So even if consumers did want to book all their annual consumption at these levels they may find themselves with nobody to trade with.”
Spot premiums are likely to continue to rise over the next year and a half, RUSAL First Deputy Chief Operating Officer Vladislav Soloviev said.
“There are different scenarios of market development, including a decline, but we do not expect this during the next 18 months. Premiums will continue to rise,” he told the conference.
Duty-paid physical aluminium in Rotterdam was quoted at a fresh record high of $270-290, rising from $260-280 at the end of August. Duty unpaid was quoted at $210-230, against $210-220 previously.
But three-month aluminium prices touched a three-year low at $1,827.25 a tonne in mid-August, after falling more than 10 percent in the second quarter.
“Unlike the underlying LME contract that is subject to greater macro influences and fund or investment inflows, the premium market is responding to factors most closely linked to the accessibility of metal,” Hodgson said in his presentation.
“Although as a producer we are happy to see this situation, we acknowledge that it poses new difficulties for consumers and producers alike, particularly in our ability to pass these costs through to the ultimate consumer.”
In Japan, where premiums are set quarterly, aluminium buyers are looking to lock in fourth-quarter supplies at a premium of around $250 to $253 per tonne, two industry sources said, about 20 percent more than the record high level of the previous three months.