Midwest P1020 aluminium premiums rise

Midwest aluminium premiums have increased as spot availability has tightened at the same time that wide spreads on the London Metal Exchange continue to support financing deals.

Metal Bulletin sister title AMM’s spot P1020 aluminium premium increased to a range of 10.75 to 11 cents per pound on Wednesday December 4 from 10 to 10.25 cents previously.

While some sources predicted that premiums could head even higher, others cautioned that the upward move could be short-lived, given new LME warehouse rules that are scheduled to take effect next year.

Rio Tinto Alcan Inc chief executive officer Jacynthe Côté said earlier this week that the rule change could push premiums downward.

In the meantime, premiums are supported by supply/demand fundamentals as well as financing deals, producers and traders said.

Exports of aluminium from Brazil, for example, have decreased recently as demand there grows, a change that has seen the country’s supplies to the southeastern USA dry up at the same time that Canadian metal – often sent to the Midwest at a discount at year-end – is heading instead to Europe as Brazilian supplies there decline as well.

In addition, the profit from sending eastern Canadian metal across the Atlantic can be higher than what might be fetched for shipments to some Midwest locations, market sources said.

Also squeezing supplies is a growing trend among integrated aluminium producers of supplying their more-profitable downstream operations with primary aluminium rather than selling it on the open market, they said.

Some consumers questioned whether metal would continue to flow to Europe for long if premiums rise in the USA, predicting instead that the USA could see a glut of offshore material in coming months thanks to what they characterized as “inflated” premiums.

“They are trying to pump up premiums right now while they can still play the financing game,” one consumer said. “But no matter what they do in the near-term, the intermediate- to long-term impact of [the new LME rules] can’t be good for them.”

A trader looking to buy replacement units said he, too, considered premiums to be too high, given that market dynamics and activity have not changed appreciably in recent weeks. Producers may be trying to make up for low LME prices with higher premiums, he said. “They need an outright number, and it’s not the LME right now,” the second trader said. “I am not disputing that they need it. But I’m not going to pay it, either.”

The cash primary aluminium contract ended the LME’s official session at $1,702 per tonne on December 4, up 0.4% from a 2013 low of $1,695 per tonne on December 3 but down 19.8% from a 2013 high of $2,123 per tonne on February 15.

Some market sources questioned whether such record-low prices might trigger production cuts, especially given increasing supplies of Chinese metal into warehouses overseas and in downstream products containing aluminium in the USA. But others said North American producers would probably resist further cuts.