The world's top aluminium producers and consumers are at loggerheads over the thorny issue of what price, or premium, should be paid to secure metal deliveries, and will conclude fewer fixed term supply deals this year, industry sources said.
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But unlike in recent years, top consumers like Novelis and Rexam have a strong hand to play thanks to U.S. regulatory scrutiny into claims big banks and trade houses artificially inflated aluminium premiums by building backlogs at London Metal Exchange (LME) warehouses.
The scrutiny comes alongside a proposed overhaul of warehouse practices on the LME, which has already helped knock European spot aluminium premiums down some 20 percent off a June record high near $300 a tonne.
"Premiums have started to come down and we hope that continues but we don't expect a major fall in levels. We haven't signed any term deals. We won't be fixing," Alex Jennings, chief purchasing officer for Rexam, told Reuters at the conference.
He added, however, that talks were ongoing.
In a bid to tackle year-long aluminium warehouse backlogs blamed for inflating premiums, the LME has proposed that as of next April, warehouse companies with wait times of over 100 days must load out more metal than they take in.
The proposal will be voted on this October, but industry players expect it to be approved given all the U.S. regulatory scrutiny, and given the LME is itself a co-defendant in private U.S. lawsuits brought on by consumers.
"If anything, the risk is that the (LME rule) change may be more substantive, and there's no doubt it will have a bearing on premiums - who would want to commit with all this uncertainty hanging over the market," said Macquarie analyst Duncan Hobbs.
Premiums are paid over the LME cash price to cover physical delivery costs, but they also reflect changes in supply-demand dynamics, like increased metal availability as a result of reduced backlogs at LME warehouses.
Falls in premiums, if they are accompanied by sustained weakness in LME prices, could erode already razor thin producer margins and force smelter shutdowns.
Macquarie's Hobbs said that with LME prices averaging just below $1,800 a tonne in the current quarter, several producers could be in the red if prices stay depressed and premiums fall by more than $25 a tonne.
"It (falling premiums) puts some of the marginal smelters in an even more difficult situation. Some smelters in Q4 may come into more trouble," said First Deputy Chief Executive of Rusal, Vladislav Soloviev.
He said Rusal had already cut 350,000 tonnes of production compared with last year, and shut three smelters.
One of the few remaining bargaining chips is the fact that Japanese buyers have reportedly been offered a premium of $250 a tonne for October-December shipments, unchanged from the previous quarter.
The final term premium is expected to be settled slightly below this level, but producers still hope the relatively high number will help influence fixed term supply deals in Europe or the U.S.
They will have a tough time convincing consumers who, if they sign long term supply deals, will probably insist on flexible terms this year such as index-linked floating premiums.
"The irony is that it was producers pushing for floating prices last year because they knew that prices would go higher. Now it's exactly the opposite situation and consumers are pushing for them," a Europe-based trader said.
"It won't be easy for the producers to persuade them to change their minds."