Orlando, Florida 14/05/2013 - Many US diecasters no longer view the LME's North American special aluminium alloy contract (Nasaac ) as an effective pricing mechanism due to the long queues and artificially high premiums resulting from warehouse financing deals, the North American Die Casting Association (Nadca) said.
“Unless the LME can make changes to the contract immediately, the Nadca will encourage all die casters to discontinue support of the Nasaac for pricing finished aluminium parts within the industry,” the trade group, which represents about 95 percent of US diecasting capacity, said in a letter exchange's aluminium warehousing committee.
Secondary aluminium alloys, including A380, 319 and 356, are used by diecasters for parts that are sold to automakers and original equipment manufacturers (OEMs). Some of these contracts have traditionally been priced using a Nasaac-based formula.
But the secondary alloys producers and diecasters now view Nasaac as an inadequate tool to derive supply contact prices; their main complaints of late centre on warehousing.
Over the past several years, market participants have discovered that they could take advantage of the wide contango, which is the premium of the forward position over the spot price, to cover the cost of storage, insurance and financing of their inventories.
But because of the overwhelming popularity of these deals, metal has piled up in LME warehouses, causing physical aluminium product premiums to spike even while overall demand remains somewhat tepid.
“Many producers of 380 aluminium alloy will no longer sell to consumers on a Nasaac basis. Material is not deliverable within the LME stated contract period,” Nadca said, noting that 52,220 tonnes or 40 percent of all LME Nasaac stocks are being held in Detroit.
The queue to remove metal from the Motor City now stands at about nine months, while the premium to pry metal from that location has reached $200 per tonne, sources said.
“There's a newly injected premium into the pricing over the last two years that was never announced and has disrupted previously agreed contracts. The situation has led to a lack of correlation between the LME Nasaac price and the physical price of 380 aluminium alloy,” Nadca said.
“Producers and consumers cannot acquire Nasaac physical material from the exchange in less than nine months from the current date. The market is perceived as being manipulated by the trading, financial and warehouse industries given financial ownership of LME warehouse facilities,” the letter added.
Since 2009, major multi-national banks and commodity trading houses have been busy buying up sheds. Most notably, JPMorgan Chase & Co and Goldman Sachs bought the Henry Bath and Metro warehouse brands respectively.
Other major mergers include Louis Dreyfus/GKE Metal, Glencore/Pacorini, Trafigura/Nems, Noble/Delivery Network, CWT/MRI and Barclays/Metalloyd/Erus Metals.
“Investment entities are buying up flow and tying physical units in warehousing deals. Die casters and their customers interests are not protected by the LME,” Nadca concluded.
The LME has amended its warehousing rules over the past two years to free up a little extra metal but consumers contend those relatively minor changes do not directly solve the underlying problems.
In 2011, the LME required warehouse companies that store more than 900,000 tonnes of metal in one location to deliver a minimum of 3,000 tonnes per day instead of the previous 1,500 tonnes per day.
And as of April 1 this year, warehouses with cancelled warrants of at least 30,000 tonnes of a dominant metal have been required to deliver out a minimum of 500 tonnes per day from that location of non-dominant metal if requested.
The Nadca has requested a meeting with the LME warehousing committee; however, a time and date has not yet been confirmed, Nadca president Daniel Twarog told FastMarkets.
(Editing by Mark Shaw)