London 25/08/2016 - The time when traders could make big money simply by sitting on aluminium stocks is long gone. It's a tougher world out there now - tiny contangos, low premiums and aggressive competition are combining to cut margins and threaten market share.
"It's been very difficult in the past 18 months or so. There are crazy low offers in the market, you can’t sell too much inventory and you can’t offer ridiculous payment terms. Even with big pockets one can't make a decent margin any more," a European trader said.
The current contango in LME forward spreads is not wide enough to generate a profit by holding metal over time - at best, it allows a stockholder to break even with financing costs if metal is stored off-warrant.
The benchmark cash-to-three-month spread dropped to a mere $13 per tonne from $35 in January 2015 following the shortening of warehouse queues and the movement of stocks to out-of-reach off-warrant locations. The rent there is 10 times cheaper than in LME compounds at around 5-6 cents per tonne and per day and the removal fee is also much lower.
"Contango is $4-5 per month but one needs $5 to cover financing costs so it's a tough game," another trader said.
"The old days of sitting there and banking cash out of the contango are long gone," a third trader said. "But you can make a tiny amount of money by storing aluminium in non-LME warehouses and a bit on payment terms too."
Neither is making money out of aluminium premiums easy. These have plummeted by 80 percent since January 2015 due to mounting oversupply and tightening spreads. The US Midwest went from 24 cents per pound delivered to just 6 cents while European and South Korean premiums slumped to around $65 per tonne from $400.
That's not to say aluminium is no longer an attractive market to be in - with more than 40 million tonnes of annual production, trading volumes are large and even a small profit per transaction can provide good overall returns. But it's no longer easy money.
New players have entered the market - Concord, Hartree and Louis Dreyfus in the past year, for instance, and Mercuria and BTG Pactual before that.
Some are reportedly offering very flexible terms to secure supply contracts and gain market share. Payment terms, for instance, can stretch to 120 days and even 250 days on occasion compared with typical levels of 30-75 days.
"You need huge financing lines for that. Small trading houses can't survive," a fourth trader.
"It's not just a matter of competition. It's time to say 'enough is enough - I won't do it just to protect my market share'," another said.
It's still possible to make money out of aluminium and traders who have been in the market for a long time will recall having to fight for every dollar even just 10 years ago.
"It's back to the old days. You're not going to make as much money - maybe your margin is $5 per tonne instead of $20-40. But if you're committed to the business, it's still alright," a trader said.
"The days of big bonuses are over. You need to control the costs, slice and dice and trade in the right way," he added.
So far, there have been few casualties from the turnaround in market conditions - companies have managed to keep standing despite some losses. But there are still some who risk losing big, having bought aluminium stocks when premiums were at their peak.
"There will be an event - someone will just cave in at some point," the third trader said. "You can't carry thousands of tonnes of metal without contango for ever."
(Editing by Mark Shaw)