Reporting by Kathleen Retourne and Archie Hunter
London 26/07/2016 - Low premiums and unattractive financing opportunities are prompting a shift of sizeable volumes of off-warrant aluminium back to listed London Metal Exchange (LME) warehouses in Asia.
In a reversal of the previous downtrend, stocks there have risen more than 55,000 tonnes since Thursday and more are expected.
The metal is mostly in the form of ingots although smaller deliveries of sows have been made into Busan and Kaohsiung - while good brands, this is reportedly unwanted old material that had previously been in tight hands.
FastMarkets lowered its physical premiums for aluminium ingots basis in-warehouse Singapore to $10-25 per tonne last week; rates remain under pressure this week, sources said.
"Premiums do not incentivise people to hold material at the moment so it gets released back into the system," a category one trader said.
The shift is also putting premiums for commodity grade aluminium P1020 ingot in-warehouse in Asia under pressure, sources said.
Traders have received warrants through the LME clearing system where dominant holders are lending to those looking to borrow for zero premium over LME cash prices.
"People will start floating Asian material because that will be the next worthless stuff. Asian warrants have already lost all their value - now you've started seeing Singapore in the daily clear," an aluminium trader said on Monday.
"Premiums are down and so the games switch. There is little consumer demand so metal is being put on-warrant as there is nothing else to do with it," a second trader said.
The Busan stockpile has risen further - it is at 135,825 tonnes, up from 105,500 tonnes on Wednesday last week. Of this total, 119,675 tonnes are available on-warrant - a multi-year high.
The Kaohsiung total has risen nearly 16,000 tonnes to 28,375 tonnes; it previously held fewer than 13,000 tonnes. Port Klang now stores 99,975 tonnes, up 7,725 tonnes.
"Typically, when traders are asking for warrants, they are now getting Asian material - this is a reversal from the previous trend. For many years it was from Vlissingen," a warrant trader said.
Vlissingen and Detroit have been for half a decade the largest holders of aluminium in the LME system but the former now holds 777,875 tonnes, the lowest since December 2011, and the latter 188,150 tonnes, the lowest since September 2008.
Metal is being moved off-warrant following a string of measures introduced by the exchange to cut queues.
Total stocks were last at 2,325,000 tonnes, of which 942,450 tonnes are cancelled, leaving 1,398,625 tonnes of available material - the highest in two months.
Another factor in the rise in warrant stocks is that financing deals have fallen out of favour. The wide contango needed to make this trade viable is absent: the benchmark cash/threes was last at a contango of $12 while cash/August was at a backwardation of $0.25.
"If the contango is low, you can't borrow at such a good level for financing deals and you can't roll with a short hedge. When the position becomes prompt, it goes back in," a category one trader said.
But further deliveries of metal are likely to widen the spread, traders said.
The three-month price has fallen to $1,603 per tonne from a one-year high earlier this month above $1,700, pressured lower partly by the stock rise.
(Additional reporting by Ian Walker, editing by Mark Shaw)