LONDON (Reuters) – Aluminum tied up in financing deals and collateral for loans, shortages and inventory draws will sustain prices in the physical market even as funds expecting sluggish demand sell derivatives.
Financing deals involve buying aluminum now and selling it forward for a higher price and profit after storage and interest costs have been deducted. These deals are often on a monthly basis and rolled over, but traders say some recent deals go out to December 2019 and March 2020.
Physical premiums in Europe, paid above benchmark London Metal Exchange prices around $1,800 a tonne, fell to $60 a tonne early January in anticipation of the removal of sanctions on Russian aluminum giant Rusal.
However, expectations that Rusal’s aluminum would flood the market were disappointed and the European premium climbed to above $90 a tonne, with some traders citing agreements near $100 a tonne. It now stands at $87 a tonne.
“European premiums picked up because people were prepared to hold metal in financing deals, not because demand in Europe has really improved,” said ICBC Standard Bank analyst Marcus Garvey.