Tumbling aluminum premiums on global physical markets mean new contracts aimed at mitigating the impact of higher costs, due to be launched by the London Metal Exchange (LME) in November, may be too late to serve their purpose.

The LME conceived the idea of a premium contract when the premiums were high and rising, queues for aluminum at LME warehouses were long and metal was tied up in financing deals.

But premiums - the surcharge to obtain physical material - around the world have tumbled in recent months as new LME rules mean falling queues at warehouses in Detroit and the Dutch port of Vlissingen, which had the longest queues, and material leaving warehouses at a faster rate.

That pace will accelerate from Aug. 1 when new measures to increase the amount of metal withdrawn from warehouses, relative to material brought in, take effect.

"Plan A was to reduce the queues and it's working, so we don't need Plan B, which was the premium contracts," a senior metals trader at a major commodity broker said.

The world's top aluminum producer Rusal said in April the LME had missed the boat on the contract.

The premium is the cost of buying metal on the physical market over and above the LME cash contract. It is aimed at consumers or producers wanting to hedge or lock in future premiums on the physical market.

The premium for aluminum in Japan has fallen 60 percent since January to below $150 a tonne on the spot market and 65 percent to below $200 in the United States. In Europe, duty unpaid premiums are down about 75 percent at just above $100.

"There's another few months to go before they launch, it may well happen that there is no premium to speak of by the time they get there," said Michael Overlander, chief executive officer at Sucden Financial.

The LME spokeswoman pointed out that premiums are influenced by a number of factors and so while they can fall they can also rise.

"Our contracts are designed to mitigate the risk attached to this volatility," she said. "The strategic need for hedging remains as many industry participants are now looking to lock in forward premiums at current levels."

The diminished profitability of financing deals where investors sell aluminum for delivery at a forward date prior to May saw a lot of metal come back to market. But these deals are becoming lucrative again, which could mean less metal is available to the market and this could once again lift premiums.

Industry sources also cite concerns about liquidity, vital for the success of the contracts of which there are four, one for the United States, one for Europe and two for Asia.

"The contracts are very dependent on liquidity. To be successful, the contract needs to find its way into physical supply contracts as a reference price," said Nick Madden, chief supply chain officer at top aluminum rolled products maker Novelis.

"We believe the LME contract will be helpful, provided it can establish adequate liquidity."

The Chicago Mercantile Exchange's aluminum premium contract illustrates the problems.

Volumes in May nearly doubled from April to around 104,000 tonnes. But that's still a very small number and highlights the difficulties facing the LME.

Complexity of the contracts related to physical delivery is cited as another potential pitfall.

But sources say that could just be an excuse for consumers, many of which do not normally use the LME to buy metal, to shun the contracts. Much of the metal used by consumers is bought on long-term contracts.

One way of resolving physical complexities would be to change the contract so that it can be cash settled, perhaps creating a simpler method of hedging.