Aluminium market's premium problem - FT.com When will aluminium premiums stop rising? That is by far and away the single most hotly debated question at the Metal Bulletin aluminium conference in Moscow, the largest annual gathering of the industry. As banks and traders" "financing deals" - in which they store vast amounts of the metal in warehouses to obtain a guaranteed return - become the dominant feature of the market, securing physical aluminium has become a costly business. Premiums - the unhedgeable cost of physical metal over and above London Metal Exchange prices - have become an increasingly significant part of the costs for aluminium buyers. Japanese premiums for the fourth quarter are settling at about $255 a tonne - more than double the level of six months ago - and producers and traders are talking about premiums of $320-$330 a tonne for European metal for the first quarter of next year. Producers and consumers alike are torn between locking in today's record premiums or taking their chances on the spot market. The first question leads to a second, which has also been on everyone's lips in Moscow, even at the Rusal "Russian fairy tale" party on Thursday night: when will the financing deals come to an end? The stock answer is: as soon as the supply-demand balance tightens and interest rates rise. But few people believe either of these things will happen soon. Rusal says high premiums are here to stay for the next 12-18 months. But there are several other risks to that bullish forecast. HKEx changes the rules and kills the trade Rusal told the conference on Thursday that it expects a change in LME warehousing rules after Hong Kong Exchanges & Clearing completes its acquisition of the exchange. The rules matter because they set the rate at which aluminium must be delivered out of LME warehouses, allowing large queues to build up and providing warehouse owners with guaranteed revenues - allowing them to pay top dollar to put further metal into their warehouses. But even though Charles Li, chief executive of HKEx, told me earlier this year that he would need to "look at the rules," few are expecting any imminent action. People familiar with HKEx's thinking say that Mr Li is more likely to commission a consultant's study - probably from Europe Economics, the group that has examined the LME warehousing system several times in the past - than come in all guns blazing as soon as he takes charge. It may be another couple of years before any actual rule changes come into effect. Consumers strike back Consumers of aluminium such as Coca-Cola, General Motors and Novelis have already been vocal in their dissatisfaction with the state of the LME market. It looks increasingly likely that the anger may translate into legal action. Bob Bernstein, a New York lawyer who is making the case against JPMorgan's copper ETF on behalf of copper consumers, believes there may be an antitrust case against warehouse owners such as Goldman Sachs, which own the overwhelming majority of warehouses in some LME locations. Mr Bernstein says that the dominant position of, for example, Goldman Sachs's warehousing arm in Detroit, "naturally raises concerns about competition and the monopoly rents that are being charged . . . This is a serious problem and it may be a legal problem. High premiums themselves are making financing deals unattractive The most immediate threat to financing deals is premiums themselves. Anyone putting on a new aluminium financing deal must secure metal in the physical market. Right now that means paying premiums of $250 a tonne or more in most parts of the world. When they eventually unwind the deal they will sell the metal, probably back to the physical market, at the prevailing premium. With premiums at record levels, traders and banks are becoming increasingly wary of exposing themselves to a potential fall. As one large player in the financing market told me: "If premiums go to $400, you can have all my metal." Goldman Sachs declined to comment.