* Premiums to fall by $127 in Europe, $82 in US -Nomura
* Financing deals to move away from LME warehousing
* 700,000-1 mln tonnes capacity to shut by 2017 -CRU
By Melanie Burton and Eric Onstad
SINGAPORE/LONDON, Aug 16 (Reuters) - Proposed rule changes
for industrial metals warehouses and increased scrutiny by
regulators are likely to unleash stored aluminium, adding to the
global surplus and forcing more smelters to shut.
The new rules will slash the profitability of financing
deals that have locked up metal in London Metal Exchange
(LME)-registered warehouses and kept millions of tonnes of
aluminium off the market, which has supported prices.
"The conclusion we've drawn from the warehousing financing
issues is that it is pretty much coming towards the end game,"
consultant Marco Georgiou of CRU in London said.
But the shift out of these deals will take years, and the
resulting cuts in production capacity may take even longer.
Benchmark aluminium prices will need to slide below recent
four-year lows to force producers, many of which are already
suffering heavy losses, to cut output.
LME-registered warehouses hold 5.5 million tonnes of metal.
Much of it is tied up in financing deals, in which investors
take advantage of low borrowing costs to sell aluminium forward
and store it cheaply in the interim.
Backlogs in deliveries from the LME warehousing
network have created long queues and inflated the premiums to
obtain physical metal, sparking complaints from consumers.
Those complaints have led to a string of U.S. lawsuits and
an LME proposal to overhaul its delivery system from next
PREMIUMS AND PRESSURE
As the new rules force warehouses to release more stocks,
LME prices and premiums are expected to decline.
"Premiums have started to fall already, and we'd expect if
the LME implements the proposals, then we'll see a reduction in
warehouse queues from next year ... that would push premiums
down further," Georgiou said.
The increased stocks will add pressure on aluminium smelters
to curtail capacity.
Smelters in Europe and North America are likely to feel the
greatest impact. U.S. producer Alcoa Inc and Russia's
Rusal have recently announced cutbacks. China, the
world's biggest producer, is not directly affected by the
premiums, and its smelters may keep churning out metal.
CRU estimates it will take until 2017 for the knock-on
effects of the new rules to force the shutdown of 700,0000 to 1
million tonnes of annual production capacity outside China.
The scope of the predicted shutdowns compares with a surplus
on the global aluminium market that is forecast to increase from
825,385 tonnes this year to 1 million tonnes in 2014, according
to a Reuters poll of analysts.
Analysts differ on how the new LME rules will affect two
elements of the total aluminium price - the LME price and the
premium for delivery of metal. The LME proposal has already
started to have an impact on premiums since it was announced
Duty-paid premiums in Europe are down by as much as $35 a
tonne to $260-$285 a tonne.
Record premiums have been a lifeline for aluminium smelters,
adding to the price they can charge to metals consumers at a
time that the underlying LME price has fallen by nearly
a third from a peak of $2,803 a tonne in May 2011.
Nomura estimates profitability of warehousing would fall by
$127 per tonne in Europe and $82 a tonne in the United States
and that premiums would probably fall by about a similar amount.
"It is fair to conclude that there will be downward pressure
on physical premiums ... but we are in uncharted waters. You'll
only get more cutbacks if the LME price does not rise to
compensate," analyst Stephen Briggs at BNP Paribas said.
Some investors in Europe and the United States are seeking
to hedge exposure on premiums, said Kamal Naqvi, head of EMEA
commodities sales at Credit Suisse, which trades premium swaps.
"We've seen interest pick up in aluminium premia swaps in
the last few weeks," he said. "There is two-way interest,
because there is so much uncertainty regarding timing and scale
of any possible decline in aluminium premia."
Last week, CME Group announced the trade of its
first aluminium Midwest premium futures contract.
Nomura analyst Neil Sampat estimates that, as more metal is
released on to the market, LME prices could slide to $1,500 a
tonne, down a fifth from current levels.
For the moment, the appetite for finance deals has
diminished slightly but not disappeared.
"It had been a pretty steadily growing business, but I
wouldn't say it's growing at the moment," said one physical
trader in London.
Higher forward prices for aluminium are still in play - a
market structure known as contango - making financing deals
"I think that now it is front page news in broadsheet
newspapers, we will see companies starting to reduce positions
(because of the risk to reputation)," a trader based in New York