LONDON, June 12 (Reuters) - High U.S. aluminum premiums and weaker returns from storage financing deals are likely to lure more metal onto the market from hidden inventories.
The bulk of more than 10 million tonnes of global stocks of the metal, mainly used for transport and construction, are outside warehouses certified by exchanges, analysts estimate.
The additional material flowing from these unregulated storage areas could help to fill a gap and supply industrial consumers if U.S. sanctions on Russia's Rusal remain.
An influx of material, however, could weigh on the market if the United States lifts restrictions on United Company Rusal , the biggest aluminum producer outside of China.
"I don't think there's a sense of an imminent correction lower in (U.S.) premiums, so I think trade houses will inevitably liquidate some of those off-warrant stocks to take advantage," said Nicholas Snowdon, metals analyst at Deutsche Bank.
The CME spot contract tracking the U.S. Midwest physical aluminum premium has more than doubled this year to 22 cents per pound.
U.S. premiums for physical metal, paid on top of the LME cash price, spiked early in the year when U.S. President Donald Trump imposed a 10 percent tariff on imports.
The premiums got additional momentum in April when Trump also slapped sanctions on Rusal.
With no hard data, estimates vary widely of aluminum inventories that are not in exchange-approved warehouses, but most analysts agree that they have not changed much over the past several years.
Snowdon estimates there are about 8 million tonnes of total off-warrant stocks outside of China, including about 2.5 million in the United States.
This dwarfs the inventories in warehouses certified by the London Metal Exchange and the Shanghai Futures Exchange, which each have around 1 million tonnes.
At the same time premiums have been climbing, returns have been declining on financing deals for aluminum in warehouses.
The gradual rise in U.S. interest rates is increasing the cost of obtaining finance for storing metal while a tightening aluminum futures curve is cutting returns.
The financing deals require a contango market structure, in which future prices are higher than nearby ones, to generate profit but the market has been trending in the opposite pattern - backwardation.
The benchmark time spread of LME cash against the three-month contract <CMAL0-3> was in backwardation for 47 percent of sessions since Feb. 15, but only 7 percent in the same period before Feb. 15.
"You're making less on the revenue side and paying more on the financing side so your margin is getting squeezed on these deals," said Carsten Menke, commodities analyst at Julius Baer in Zurich.
Although conditions were ripe for liquidation of off-warrant financing deals in the United States, the situation was different elsewhere, said Eoin Dinsmore at metals consultancy CRU.
In Asia, spot aluminum premiums have nearly halved in recent weeks, driven down by an influx of Chinese metal and bets that Russian producer Rusal will avoid sanctions, while they have also dropped off in Europe.
"There's been a huge incentive to unload material in the U.S., but if you're sitting on something in Rotterdam, you haven't had that big push," Dinsmore said.
Some traders are likely to bear the cost of rolling over their financing deals even though returns are weak because they are hoping for even higher physical premiums, analysts said.
"The problem is people have built careers on these sort of trades, so they are quite sticky, it takes a lot for people to bale out," said Oliver Nugent, commodities strategist at ING Bank in Amsterdam.
(Reporting by Eric Onstad; editing by David Evans)