ALUMINUM REELING FROM SQUEEZE ON SUPPLY, PRICES

"Banker grab" hits with backwardation.

Aluminum locked up in long term financing deals could be released as a result of a backwardation that has emerged in the August-September forward prices on the LME, market sources told AMM.

The emergence of higher prices for August compared with September is a dramatic reversal of the healthy contango that has existed for the past 2 years and prompted the long term financing deals that tied up millions of tons of aluminum in warehouses. The financing deals only make sense when the costs of financing and rent are covered by the healthy contango.

Some banks with long positions are said to be unwilling to lend which is fueling the backwardation and leaving shorts with few options other than to release metal.

Most of the nearly 4.4 million tons of aluminum in LME warehouses and as much in off exchange deals is rumored to be tied up in long term financing deals. Aluminum is locked up and it's not available in a contango, but it will be available in backwardation the market source says.

The idea is you get more value than what is costs you, said a physical trader, describing the tactic as a "banker grab". Only banks with financial firepower would be able to create this kind of squeeze.

The backwardation may evaporate by the third Wednesday prompt dates, but there is nothing to stop another squeeze in the future market participants said.

ALCOA PUSHES NEW ALUMINA PRICING

Alcoa Inc is changing the way it prices alumina as its long term contracts come up for renewal, according to Chairman CEO Klaus Kleinfield.

Alcoa's long term supply contacts had priced alumina as a percentage of exchange traded aluminum, but as the contracts come up for renewal the company is pushing customers toward higher non LME linked prices.

Alcoa changed their pricing to reflect market conditions as well as underlying costs, and this had yielded a higher price percentage of LME.

Over the past decade, the LME price and cost inputs of alumina did not move in tandem. Alcoa believes it is time for the industry to develop a new price methodology going forward.

An alumina pricing index is still in development, but Alcoa reiterated this week that it will support such a pricing mechanism once it comes to fruition. They are moving toward indexed pricing as they are going into 2011.

The fear of some customers is that the information given to such an index unless it's truly transparent is always lagged for not even accurate. Customer's really unwilling to switch may be able to hold out paying a percentage of LME a bit longer but not at the 14% and lower rates that have been offered in the past contract years. Prices are going up one way or another. The 12% are not there anymore and they haven't been for years.