NEW YORK The
Midwest aluminum premium is a "bubble" thats set to pop
because it is driven by the financial community rather than
supply and demand, according to one aluminum industry
"The Midwest premium
is in a bubble when you look (at premiums being) at all-time
record highs yet the supply-demand fundamentals and the
outright price at the LME (London Metal Exchange) are at
historical lows; to me that feels like a bubble," Theodore
Lehmann, vice president of metals procurement for the Americas
at Cleveland-based Aleris International Inc., said in an
interview on the sidelines of AMMs Aluminum
Summit in New York. "I dont know how that bubble will
play out over time, but bubbles tend to pop at some point."
Lehmann said he found
"disingenuous" notions that P1020 aluminum premiums might be
bridging the gap between some aluminum producers
production costs and low exchange prices. High Midwest premiums
are a function of LME rules and "cash-and-carry games," he
deals also have been driven by "cheap money" policies worldwide
resulting from economic easing efforts, which have given
traders and banks incentive to take advantage of profitable
warehouse deals, Lehmann said. The current warehouse conundrum
"is the unintended consequences of cheap money, clearly."
Because of industry
supply-demand fundamentals, aluminum prices should be low,
"There is a lot of
capacity out there and it is in excess of what the physical
markets needs are, so if things were just supply-demand
related why would the premium be high?" he asked, contending
that financial markets are a bigger driver of Midwest premiums
than physical supply-demand fundamentals.
Lehmann and other
speakers in prepared remarks also pointed to increased pressure
on scrap markets as more aluminum producers look to boost
recycled content. However, he brushed off the idea that scrap
could at some point become more expensive than prime, arguing
that it would "never" happen.
When scrap costs,
including processing costs, are at break-even to prime and
hardener costs, Aleris would switch to prime because scrap is
dirtier and involves extra handling, Lehmann said. "We use
scrap because it is cheaper than prime. ... On some grades,
(the spread between prime and scrap) has narrowed quite a bit,"
but even if scrap briefly became more expensive than prime, it
would put pressure on primary markets to raise prime prices as
demand for prime rose.
"The markets would all
react negatively to" scrap becoming more expensive than prime,
Lehmann said. "The price ceiling to a particular grade of scrap
is going to be what it takes to make the particular product of
prime and the various alloying elements. Its not going to
go above that because it wouldnt make economic sense for
anybody to do that."