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Market divided on aluminum premiums

Keywords: Tags  Midwest aluminum premium, LME, aluminum scrap, P1020, Michael Cowden

CHICAGO — Midwest spot aluminum premiums remained unchanged last week amid what appeared to be considerable uncertainty about the direction of the market.

Some market players insist that premiums are poised to move upward, citing profitable warehouse financing deals, the use of P1020 as a substitute for scrap and the possibility of continued low prices on the London Metal Exchange forcing some smelters to shut, thus reducing supply.

The LME’s cash aluminum contract ended last week at $1,890 per tonne, up 4.8 percent from a recent low of $1,804 on April 15 but down 11 percent from a 2013 high of $2,123 per tonne on Feb. 15.

AMM’s Midwest premium was unchanged in a range of 11.2 to 11.85 cents per pound

"The only way things are going to get better is if (smelters) shut. No one wants to shut. But someone has to take the pain," one trader said.

A second trader agreed, saying that low LME prices represented a "ticking time bomb" unless they stage a strong rally and give smelters a "stay of execution." If they don’t, capacity will close and "will completely change the landscape of the market" as supplies tighten.

But other sources said the current market is anything but tight, claiming some participants may be trying to talk up premiums in an effort to cover long positions and avoid seeing the value of big stockpiles decline. Still others suggested that producers, hurt by low LME prices, might have motive to talk up premiums, which at historically high levels could mean the difference between turning a profit or losing money.

Some sources said that capacity being idled was hardly a foregone conclusion, arguing that even if some domestic smelters were to shut, there would still be too much production globally, given what was generally characterized as steady but not robust demand.

Sources also disagreed over whether a backwardation in the LME spreads might put downward pressure on premiums, with some contending that the backwardation had not been consistent enough or pronounced enough to make much difference. "It doesn’t seem to be affecting the market," one producer source said.

LME price movements aside, some market observers said the market does not look encouraging from the ground level.

"We have two or three traders really trying to get metal through our door. Whether that’s just aggressive marketing or because they have long positions, I don’t know," one consumer source said. "Everything I hear out there is that there is a lot of metal sitting around ... all dressed up with nowhere to go."

"I don’t think anyone is talking about order books being dramatically better," a second consumer source said. "If anything, a lot of people are probably feeling less certain about the economy than they were a few weeks ago."

While premiums may be bolstered by P1020 being used as a replacement for scrap in the short term, that factor will fade as spring weather sees increased scrap flows, he said.

A third trader agreed with the consumers. "There is no 12 (cent Midwest premium). People are saying, ‘I can sell at 12.’ But there is discounting going on," he said, noting that he was losing business trying to sell material at a Midwest premium slightly below 11.5 cents. "It gets to the point where the gig is up, and I think the gig is up. People have to sell tonnage. And at some point, if it doesn’t go to the LME, it has to go to the market. And if it goes to the market, there are going to be discounts."

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