European aluminium premiums soften on 2012 caution

Falling European aluminium premiums reflect concerns over a potential 2012 economic slump, but German industrial demand and financing deals are buttressing demand for now, traders said on Thursday.

Traders noted a divide between countries in the north versus the south of the European Union. German industry has kept orders ticking over, while consumers in the debt-plagued south have preferred to de-risk and de-stock as 2011 business begins to wind down.

Strength is coming from the auto sector for now at least, while traders pointed to weakness in extrusions, where aluminium is used in packaging and construction.

"The economy is not as bad as people might perceive it," said a physical trader at a European merchant.

"Especially in the northern part of Europe, or in Germany. We have a lot of contracts (and) ... Customers are taking every single tonne, without any delays," he added.

"In southern Europe it's a bit weaker, but that's no surprise ... considering the issues surrounding Greece."

The premium for duty-paid physical aluminium in Rotterdam AL-WDP was quoted at $185-$205 over the London Metal Exchange(LME) cash price of around $2,202. One sale was logged as low as $165 on top of LME, although consensus was that this was well below the market.

That's down from mid-August, when premiums were quoted around $200-$230.

Traders said that term deals for 2012 were delayed, which in essence suggested more material would be sold on the spot market next year. Consumers are playing a waiting game to see how the European debt crisis will unfold.

"Some sellers might get nervous as ... long-term contract discussions are getting to a stage where consumers would rather wait until November, December until they make their final decision," he said.

"That always leads to spot sales, which are under the market," he added.

There is a growing chance the euro zone economy will slip into recession as fears rise that the debt crisis will escalate, financial markets will slump further and a global slowdown knock growth, a Reuters poll predicted on Thursday.

Recent purchasing managers' indexes suggested the bloc's private sector contracted for the first time in two years last month as new business dried up, while the debt crisis cut expectations for the future to two-year lows.

But euro zone industrial production was much stronger than expected in August, data showed on Wednesday, indicating the slowdown in the third quarter might be smaller than feared.

A trader at another European merchant noted, however, that if any of his customers wanted to off-load metal, finding a buyer is tough.