The financing of aluminum will continue in non-registered London Metal Exchange warehouses, Colin Hamilton, head of global commodity research at Australian investment bank Macquarie said Thursday.

"Essentially given where the contango is, it makes more sense, if you're sitting with material in those off market warehouses, especially with the contango we've seen in recent weeks, we'll certainly see financing coming back," Hamilton said at presentation at the bank's offices in London to launch its commodities outlook.

Basis the LME official prices, the cash-threes spread was in a $40/mt contango (when the spot price is lower than the forward price) May 21, having been in a deep and prolonged backwardation (when the forward price is lower than the spot price) for most of the first quarter.

A contango makes stock financing profitable, especially when warehouses offer discounts on storage costs.

However, Hamilton said the real question is whether the appetite for the financing of material is really still there.

"The question is, is the appetite there? Obviously it's a lower margin business than it was...now it's a little bit harder. There probably are some opportunities out there for people who have a balance sheet because you can pick up fresh metal without having to pay high premiums... but this isn't going to happen in the LME [warehouses]," he said.

LME WAREHOUSING LESS RELEVANT

Hamilton said "without wishing to bash the LME," the exchange was becoming less relevant in warehousing because the rent was too high.

"Why would you store material in an LME warehouse?" Hamilton said.

He noted that the sudden collapse of aluminum premiums in recent months had been a surprise.

Physical aluminum premiums have come under considerable pressure since the end of 2014 in every global region, with a fall in purchasing in the physical spot market, increased supply, a rise in Chinese exports and tighter LME spreads all playing a role in reducing premiums.

These factors have seen premiums fall from all-time highs, with the Platts US spot premium down around 55% to date from a high of 24.25 cents/lb ($535/mt) in January, the European duty-paid premium down by 70% from a high of $500-510/mt in October 2014, and the CIF Japan premium falling by around 71% from an all-time high of $425/mt in January.

"The aggression with which it happened [was a surprise]... I thought they were going to 'normalize' over a two year period but they got back to normality much, much quicker than that...it's been compounded by a bit of a rush to the exit door."

He added that he thought the Midwest aluminum premium would still fall in the near term and that the "normal" premium value -- the cost of getting material from a marginal seller to a marginal buyer -- in the US should be around 7-7.5 cents/lb, plus LME cash, delivered Midwest.