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P1020 premiums up, but demand lags

Keywords: Tags  Midwest premium, P1020, LME, London Metal Exchange, scrap, freight, aluminum, Mike Cowden

CHICAGO — Midwest P1020 aluminum premiums have inched up over the past week amid a combination of attractive warehouse financing deals, a tight scrap market and increased freight costs, market sources said.

But while market players contacted by AMM generally agreed that premiums had risen modestly, most also said demand from physical end-users hasn’t increased.

AMM’s Midwest premium range has moved to 11.6 to 12 cents per pound from 11.5 to 12 cents previously.

The biggest factor driving premiums upward is that warehouse financing deals are profitable because spreads on the London Metal Exchange are in contango, one trader said. "Demand is just average: not great, but not awful either," he said.

The trader conducted deals at 11.6 to 12 cents per pound over the past week at volumes ranging from 100 tonnes to roughly 5,000 tonnes, he said. However, transactions at 11.6 cents were largely available only at such locations as Oswego, N.Y., that generally see a discount relative to the rest of the market, he added.

"There is a nice contango in the market, so people will just hold on to the metal if they don’t get the premium they want," a second trader said.

Low LME prices are also causing some scrap dealers to hold on to material because of contracts linked to the exchange, he said. This has created tightness in the scrap market in some regions of the United States, he said.

The cash aluminum contract ended the LME’s official session at $1,813 per tonne June 13, down 5.9 percent from $1,927.50 per tonne June 6 and off 14.6 percent from a 2013 high of $2,123 per tonne recorded Feb. 15.

A third trader contended that produce season, delayed by bad weather in parts of the United States, has limited truck availability as trucking firms move more profitable "reefers," or refrigerated containers, instead of flatbeds for metal. Storms, especially in the Oklahoma City area, have also seen trucks diverted from their typical lanes to provide supplies to hard-hit areas, he said, adding that high fuel prices and more stringent government regulations are also driving up freight costs.

But the third trader questioned the health of the overall market, noting that his company had seen a quiet market for Midwest premium swaps and no recent inquiries to buy or sell physical metal. In theory, premiums should be bolstered by limited and high-cost trucking capacity, a market in contango, tight scrap and the possibility of more aluminum production coming offline unless LME prices recover, he said.

"But at the end of the day, people need to buy metal if you are going to see support for (higher) premiums, and it’s not clear that that is happening," the third trader said.

One producer source said his company recently booked 1,000 tonnes at a premium of 11.9 cents, with other recent deals ranging from 11.75 to 12 cents. But he, too, cautioned against bullish predictions of rising premiums.

"There have not been many developments (in the market)," the producer said, adding that most of his company’s spot transactions have been above published price levels for some time.

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