Aluminum giant Alcoa of Pittsburgh this month began shortening payment terms for some its ingot products to five days from 30 days, citing increased credit risk and escalating freight costs. Previously the company based ingot prices on regional premiums over London Metal Exchange (LME) settlement prices with 30 days to pay.
     â€œWith the skyrocketing logistics costs associated with delivering this product to consumers, and the low implied interest rates that are factored into regional premiums, in concert with the increased risk profile in today's business climate, we have concluded that regional premiums are no longer adequate for Alcoa to continue selling unalloyed ingot on open net 30-day credit terms from date of shipment,” the aluminum company wrote in a June letter to customers.
     Effective with supply
contracts signed after July 1, Alcoa's new payment terms for the sale of standard commodity-grade unalloyed ingot in North America will be five days from date of shipment for truck cargoes and 20 days from shipment for rail direct or rail and dray shipments. Alcoa says the change will align the company's sales of these products in North America with credit terms in effect for other regions. The change also aligns the sale of these commodity aluminum products with other competing metals, such as copper.
     Kevin Anton, Alcoa vice president and president of Alcoa Materials Management, tells American Metal Market that the company had to adapt to the current business conditions. “In my mind, what pushed us over the edge was the whole credit issue in North America and the capital structure of many of the participants in downstream parts of the industry,” he says.
     Anton says Alcoa can sell to the London Metal Exchange and receive cash immediately, but it might take a customer 30 to 45 days to pay, assuming they pay at all. He says by way of example that the financial benefit of selling ingot to a customer is about 1.5¢/lb, but to receive that it must risk the entire ingot price of around $1.40/. “That's an awful lot of risk to get a pretty small return,” Anton says. That's why the industry as a whole is moving toward shorter payment terms to reduce their credit risks during the weaker end-use environment.


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