Those forced to pay the new record highs in the aluminium premiums in the USA may not feel like breaking into song, but they will certainly be asking \u201cWhat\u2019s going on?\u201d<\/p>\n
Midwest premiums shot up at the start of the year, and are now north of US$400 per tonne. \u00a0(Midwest premiums are quoted in US cents per pound). \u00a0 They are now up 85% since October last year.<\/p>\n
It seems, according to Barclays Bank, that a combination of events has triggered the dramatic rise. \u00a0 Now that LME warehousing costs are visible, and with a large difference between LME warehouse costs and those of non-LME warehouses, there is a rush to move metal out of LME warehouses. \u00a0 That has created a bottleneck at the \u201cout\u201d door of the warehouses, forcing buyers to pay extra to get their metal on time. \u00a0 Barclays also hint that perhaps part of the squeeze is due to a large player (unnamed) may have been caught short and had to act quickly to cover his position.<\/p>\n
Barclays say that the spike will likely be temporary only, which makes sense when looking at their stated reasons for it happening in the first place.<\/p>\n
But will we see a return to \u201cnormality\u201d, or has a new threshold been established? \u00a0 To my way of thinking, the USA is going to be structurally short of metal over the longer term. \u00a0 It\u2019s highly unlikely we will see any more smelting capacity added to the country, unless perhaps Ormet restarts. \u00a0 But fundamentally, the USA consumes more aluminium than it produces. \u00a0 Of course, it has the Quebec smelters just over the border, but that is still technically an import, and will likely not prevent a new floor in premiums being established. \u00a0 As the US economy recovers, and as auto and aerospace industries start to consume more metal, the squeeze on premiums is likely to only get worse.<\/p>\n
Rusa\u2019s Oleg Mukhamedshin warned the world 4 or 5 months ago, that the supply-demand equation is shifting to a shortage. \u00a0 There is precious little new capacity likely to enter the market in the next 5 years (and none in the USA, apart from perhaps a restart or two), yet demand is set to rise. \u00a0 Sure the aluminium market is weighed down by all the metal in inventory, but that is still only 4-5 months supply. Structurally, if that overhang reduced by half, the metal price will respond strongly.<\/p>\n
Unfortunately for consumers, so will premiums in such a scenario. \u00a0 Or at a minimum, they will stay strong.<\/p>\n
But in all the hubbub about US premiums, no-one that I have read has yet made the connection between what has happened in the USA, and what will happen in Japan, in the next round of negotiations in 2 months\u2019 time. \u00a0 If the premiums have risen due to LME-based dynamics, then it\u2019s likely that unless those dynamics change dramatically, and soon, Japanese buyers will soon be crying.<\/p>\n
Mr. Paul Adkins is co-founder and Managing Director of AZ China Ltd, a leading consultancy on China\u2019s primary aluminium industry. Paul has more than 30 years of experience, including almost 14 years with Alcoa, 5 years with the former Alcan (now part of Rio Tinto) and 4 years with Tomago Aluminium in Australia.<\/b><\/p>\n