European aluminium consumers under higher premium pressure

The European aluminium market saw physical premiums increase this week as supply remained tight and material continued to be tied up in warehouse and unavailable to the physical market.

The higher premium levels are starting to see a growing awareness among consumers that their margins are likely to be squeezed as they struggle to pass on higher costs to end-users who are not seeing a significant improvement in new orders.

There was a wide spread of premiums quoted across the market with one European trader stating that premiums for duty-paid were as high as $250-255/mt and $195/mt for duty-unpaid plus LME cash.

However, a second trader scoffed at premium levels this high.

"If you hear those numbers it's like me telling you I'm three meters high, however, if I tell you I'm one and three quarters, you might believe it," he said.

The first trader said that availability of material was tight and that smelter closures were having an impact.

"To be fair, there is a lack of material on the ground and plant closures. The contango keeps premiums where they are," the first trader said.

However, the second trader said that he was only seeing premiums at $140-150/mt for duty-unpaid and $200-220/mt for duty-paid plus LME cash.

A producer source agreed.

"It's pretty quiet, but there isn't that much metal to buy," he said.

The producer was seeing premiums around $155-165/mt for duty-unpaid and $215-225/mt for duty-paid plus LME cash.

He said that finance deals were keeping the market tight and that stable demand in the US and China meant that metal was going to these destinations.

"Numbers have to be high to attract metal from other places," he said.

The producer did not expect much of an improvement in demand this quarter compared to the first quarter.

A second producer said that premiums were continuing to be pushed up by finance deals.

"So much metal is getting tied up in warehouse. It's the structure of the contango. Cheap money means that it's easy to do financing deals. I see no change in the foreseeable future," he said.

He said that premiums were around the $150/mt level for duty-unpaid and $210-220/mt for duty-paid plus LME cash. "It's artificial tightness," he added.

The second producer said that because finance deals were pushing up premiums, it meant that there was increasing pressure on consumers' margins.

"Investors are easy to do business with and consumers' margins are under pressure, they are starting to realize this now," he said.

He noted that consumers were struggling to pass on the higher costs to their customers who were not seeing a significant improvement in terms of new business.

The second producer believed that consumers would be under increasing pressure in the longer term if finance deals remained attractive.

"Next year we will see people start to struggle," he said.

The Platts assessment for duty-paid Good Western, in warehouse Rotterdam increased to $210-220/mt from $205-215 plus LME cash. Duty-unpaid Good Western was up at $145-155/mt from $140-150/mt plus LME cash, in-warehouse Rotterdam.

A7E was also up at $145-155/mt from $140-150/mt plus LME cash, duty-unpaid in-warehouse Rotterdam. A7E FOB St Petersburg increased this week to $125-130/mt from $120-125/mt plus LME cash.