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P1020 premium ‘bubble’ likely to pop: exec

Keywords: Tags  Midwest premium, aluminum premium, Aleris International, Theodore Lehmann, LME, London Metal Exchange, aluminum prices, AMM Aluminum Summit Michael Cowden

NEW YORK — The Midwest aluminum premium is a "bubble" that’s set to pop because it is driven by the financial community rather than supply and demand, according to one aluminum industry executive.

"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 AMM’s Aluminum Summit in New York. "I don’t 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 said

Warehousing financing 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, Lehmann said.

"There is a lot of capacity out there and it is in excess of what the physical market’s 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. It’s not going to go above that because it wouldn’t make economic sense for anybody to do that."

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