London 14/01/2016 - LME aluminium spreads have moved into backwardation again for nearby dates and, this time, the forward curve has tightened too, making financing a less profitable business and probably pushing more stock off-warrant.
The benchmark cash-to-three-month spread was last at a backwardation of $7.50 per tonne compared with a $4.75 contango on Monday, with all nearby dates until April trading in backwardation.
In the LME forward bandings data, the January date shows a major long holding 20-29 percent of the open interest and two other longs of below 19 percent, while there are six shorts for the same date.
"January-March is looking challenging - a few people thought the backwardation was gone and are now having to borrow," a trader said.
Forward spreads have also tightened, indicating borrowing is indeed taking place. Three-months to December now stands at $19 contango compared with $25 two days ago and a rate closer to $45 last week. Dec16-Dec17 is at $40 contango or less than the full-financing cost of aluminium, sources said.
"Aluminium spreads have collapsed - there's nothing all the way down the curve. The whole year is worth $20. That's peanuts. We used to get $5-6 a month at least," a broker said.
LME spreads were in backwardation several times last year - in March-April and in August-October - while the January-February 2016 dates had been looking tight and volatile for some time. Previously, the market had simply pointed fingers at the main long, JP Morgan, but the landscape and the rhetoric appear to be changing.
"This time it's not about JP Morgan squeezing the market but a natural reaction to the new LME rules as we get closer to their implementation, especially QBRC," another trader said.
"The whole curve is terrible - you are not just hit for a month before getting back to a nice $15 [monthly] contango," he added.
New LME rules on increased load-out rates (LORI) and queue-based rent caps (QBRC) will come into play in March and June this year respectively. Stocks in Vlissingen will be free of charge from June 30 and become very attractive units, encouraging borrowing as that date approaches, sources noted.
FINANCING NO LONGER STRAIGHTFORWARD BUSINESS
Overall, financing aluminium is becoming more complicated - interest rates are rising in the US and LME spreads are no longer wide enough to cover financing costs, especially for metal stored on-exchange due to the much higher LME rents.
Consequently, metal stocks have continued to gravitate towards non-LME storage facilities, with flows expected to accelerate ahead of April 1 when LME rents rise by a further 10 percent.
Last year, 2.03 million tonnes of primary aluminium exited LME-listed sheds compared while 716,300 tonnes were delivered in. Outflows were mainly in Detroit and Vlissingen, where Metro and Pacorini Metals respectively have long delivery queues.
"There is no point putting metal on the LME these days - less and less is being warranted. Better to stay off-warrant and get your cheap storage," a metal financier said.
Rents off-warrant are anywhere between five and 10 cents per day and per tonne depending on location compared with LME rents of 50-55 cents per day and per tonne and up to 72 cents from April 1.
Financiers are increasingly basing their finance costs on off-warrant charges because financing metal on LME is no longer profitable, assuming warehouses charge their listed rents.
"Full-finance contango is no longer related to LME rent - at least not beyond TOM/next," the financier added. "I think financing cost is closer to 5-7 cents per day than 50 cents."
Based on borrowing costs of 1.25 percent and non-LME rents at 10 cents per day, one needs $55 a year to finance aluminium at present, for instance, which is more than the current spreads offer.
But those who can secure a rent deal at five cents a day and borrow at less than one percent are still making money by financing aluminium.
"Many people with cheap finance can still make the sums work but it's becoming tight," a trader said.
(Editing by xx)