PHYSICALS - Korea-based ali delivered against 2016 US contracts - sources

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Ian Walkerian.walker@fastmarkets.comPhysicals Reporter+44 (0) 20 7337 2145

London 05/10/2016 - Traders have been delivering against 2016 long-term and fixed contracts for aluminium supply in the US Midwest using an arbitrage opportunity between material stored in South Korea and the US market, FastMarkets understands.

With warrants freely available at zero premium over LME cash costs in Korea, some trading houses have been shipping material from the ports of Gwangyang, Busan and Incheon directly to the US at a profit, sources claimed, particularly throughout the third quarter.

Inventories in LME-registered warehouses in South Korea have jumped a net 204,800 tonnes this year after the most recent 34,475-tonne delivery on Monday, compared with growth of 20,275 tonnes in 2015 and a fall of 21,075 tonnes in 2014.

Warrant traders are able to pick up warrants through LME clearing in the Korean ports with relative ease. There are also around 400,000 tonnes of off-warrant material in the country, which carry small FOT charges.

Warrant traders in London have been actively sifting for good-quality brands in South Korea, sources told FastMarkets, to take advantage of low cross-Pacific shipping rates in August and parts of September and deliver against fixed contracts in the US, which were settled at 9-10 cents per pound or $220 per tonne.

Some shipping lines, including the beleaguered Hanjin - were offering freight rates as low as $400 per TEU (twenty foot equivalent, the most common form of container shipping) in August, FastMarkets understands.

According to ISO standards, the maximum weight of a twenty-foot container is around 22 tonnes, including the empty weight of the container itself, which is around two tonnes.

Around 20-21 tonnes of metal fit into a standard TEU, which at $400 for transpacific shipments works out at around $20 per tonne to ship from Korea to the US. Even at some of the higher rates reported during the time - up to $650 per container or $32.50 per tonne - the trade is still profitable.

Adding free-on-truck charges (FOT) of around $44-45 per tonne for most warehouses in Busan and a further $20 free-on-board (FOB) charge to put the material on a ship, the initial cost of moving the material minus any financing costs is $65-70 per tonne.

Upon the material arriving in, for example, New Orleans, stevedore charges are around $15-16 per tonne, one warehousing source said. A further $13-14 for barge freight will take overall costs up to $135 delivered into New Orleans or 6.1 cents per pound.

The material must then be transported either to the major fabrication region around Owensboro and Kentucky or to Detroit warehouses - sources estimate the cost of this at around two cents per pound or $44 per tonne. This brings the overall cost of delivering material to the US Midwest from Korea to eight cents per pound or around $176 per tonne.

At current spot levels of 6.25-6.75 cents per pound, this would be unprofitable - spot rates were last as low as eight cents in April, according to FastMarkets' assessments.

But at annual and fixed-rate contracts at 9-10 cents, traders can make margins of at least $22-44 per tonne, minus any financing costs.

Shipping rates have risen to as high as $1,000 per TEU since Hanjin declared bankruptcy, limiting arbitrage opportunities between the two regions.

But South Korea is increasingly viable as a storage and financing hub. There are now 268,225 tonnes on warrant in sheds in Busan, Incheon and Gwangyang, representing 21 percent of global LME stocks, up from four percent at the start of this year.

And due to consistent stock drawdowns in Vlissingen in the wake of new LME rules, availability in Korean ports has jumped. Cancelled warrants are much lower than in other locations - a combined total of just 15,425 tonnes are listed in the three Korean ports compared with 62,325 tonnes in Rotterdam, 56,225 in Singapore and 485,950 tonnes in Vlissingen.

The US is a natural deficit market - its five remaining primary aluminium smelters will produce less than one million tonnes of the metal this year, which pales in comparison to annual demand of about six million tonnes.

(Additional reporting by Perrine Faye and Tom Jennemann, editing by Mark Shaw)



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