LME sees a flat week while premiums continue to rise

LME officials saw a flat week, with cash prices hovering about $2,025/metric ton. The promise of additional policy support that helped rally prices over the past five weeks (September’s European Central Bank interest rate cut and October’s Bank of Japan QE announcement) has collided with fresh evidence of continuing softness in aggregate demand, highlighted this week by disappointing flash Purchasing Manager Index reports for both the Eurozone and China.

The more interesting story, however, was in premiums, which continued to rise globally and have now crashed through $500/metric ton in North America. While much attention has been focused on the reasons why premiums are elevated, (see the U.S. Senate’s Permanent Subcommittee on Investigations report on bank involvement in commodity markets released this week), aluminum’s recent shift into deficit probably explains their most recent jump.

This growing physical tightness in the market can also be seen in a spreads, with the LME cash-3 month difference slipping into backwardation and the cash-12 month spread narrowing sharply since the start of October. Since the size of the contango and low interest rates are the two driving forces behind the so-called financing deals that have locked up inventory, a narrowing in spreads and the promise of higher interest rates next year may signal their unwinding.

Finally, the continuing shortfall in bauxite production remains an underappreciated development. Primarily because of Indonesia’s ban on exports, global bauxite production is down by more than 20% over the first nine months of the year compared to 2013. It is an open question whether surging Malaysian production will be able to offset the continuing loss in Indonesian output and avoid what amounts to a slow burn in the industry.

Industry Activity
• Estimated net shipments of Aluminum Sheet and Plate by U.S. and Canadian producers totaled 698.8 million pounds during October 2014.
• Preliminary estimates indicate that aluminum demand in the United States and Canada (shipments by domestic producers plus imports) totaled an estimated 19,219 million pounds through September 2014.
• Shipments of Aluminum Powder and Paste to domestic markets by domestic producers, including imports by domestic producers, totaled 9.65 million pounds during October 2014.
• Estimated shipments of Aluminum Forgings and Impacts by U.S. and Canadian producers totaled 28.6 million pounds during October 2014.
• Estimated shipments of Aluminum Drawing Stock, Bare Wire and Rod & Bar by U.S. and Canadian producers totaled 110.8 million pounds during October 2014.
• Shipments of Aluminum Extruded Products (extruded shapes, pipe & tube, and rod & bar) by U.S. and Canadian producers totaled an estimated 415.6 million pounds during October 2014.