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Midwest aluminum premiums flat

Keywords: Tags  aluminum premiums, Midwest premium, aluminum, London Metal Exchange, LME, aluminum prices, Michael Cowden

CHICAGO – Midwest premiums for P1020 aluminum held steady this week, but outlooks were mixed on its future direction.

AMM’s Midwest premium remains unchanged at 11.6 to 12 cents per pound.

While several market sources are predicting an increase, others question whether such a move—while possible and perhaps likely—would be sustainable.

Supporting premiums are a tight scrap market that is boosting P1020 demand as a scrap substitute, warehouse financing deals that remain profitable amid low interest rates and forward spreads on the London Metal Exchange that are in contango, and limited availability because of long queues at LME-listed warehouses, market sources said.

Several market players pointed to metal moving into Detroit at an increased clip in recent days, perhaps from other LME-listed warehouses.

"Things are quite strong. ... We saw a tick up (in business) after a slow April and May," one trader said, citing a recent transaction of 500,000 pounds at a premium of 12 cents per pound. But the trader also lamented that published Midwest premiums were generally not reflecting his company’s replacement costs.

A consumer source said P1020 demand and Midwest premiums were little changed from last week. Scrap continues to be tight in some regions of the United States, meaning remelters in some cases are sourcing P1020 as a scrap substitute, he said.

The situation has been exacerbated by a trend of soft drink and alcoholic beverage producers switching to aluminum cans, squeezing availability of used beverage cans (UBC), the consumer said.

However, other than scrap substitution and profitable warehouse deals, there is little support for premiums at or above 12 cents per pound, he said. While the consumer noted a recent purchase at 12 cents, he said it was for a small order and material could still be secured at 11.6 to 11.75 cents for larger buys.

A second trader said his company conducted most spot P1020 business at a Midwest premium of 11.75 cents, although there were relatively few spot inquiries despite LME prices hitting new lows.

"People should be coming in to buy more metal at attractive prices, but we’re not seeing that—so the expectation is that the price might drop a little more," the second trader said.

The cash aluminum contract ended the LME’s official session at $1,748.50 per tonne June 20, down 5.1 percent from $1,843 per tonne June 12 and 17.6 percent below the 2013 high of $2,123 per tonne recorded Feb. 15.

The second trader and other market sources also questioned how long Midwest premiums could continue to climb as LME prices explore new depths. Midwest premiums are essentially at parity with premiums in Japan, an anomaly given that Japanese premiums tend to be higher, he said.

"Producers need the (high) premiums to stay above water," the second trader said. But even with high premiums, producers in some cases still aren’t able to reconcile their costs of production with low LME prices, he warned.

The second trader also speculated that at some point consumers might begin to balk at high Midwest premiums and cautioned producers against relying on premiums alone to meet production costs.

A third trader echoed that sentiment. "One direction: bullish. I heard (the Midwest premium) is going to 42 cents," he joked, also agreeing that a tight scrap market and no backwardation on forward LME spreads were supporting premiums.

Assuming interest rates don’t rise, the outlook for premiums should, in theory, continue to be bullish, he said, although he expressed concern about the physical market.

Warehouse deals have created artificial tightness in the market and encouraged producers who might otherwise have idled production by now to keep running, the third trader said. "They are flooding the market with inventory, and the only thing saving them is premiums at 12 cents. Otherwise capacity would be shutting left and right," he said.

Instead of shutting capacity, producers will most likely opt not to restart capacity that has already been idled, the third trader added. "The problem is, that doesn’t really have any impact on the market."

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