CHICAGO Midwest premiums for P1020 aluminum increased this week as big price declines on the London Metal Exchange led traders to hold onto metal and producers to push for higher premiums in an attempt to stem losses, market participants said.
AMMs Midwest premium increased to 11.75 to 12.25 cents per pound June 26 from 11.6 to 12 cents previously.
"Everybody is soaking metal into warehouses and nothing is coming out. And if you are buying from producers, they are selling through the traders who are driving up the premiums," one consumer said. "No one is realistic about what the premiums should be. Your beer (can) producers are not real happy.
LME-listed warehouses held 5.45 million tonnes in stock worldwide June 27, up about 200,000 tonnes from mid-June, according to data from the exchange. The cash aluminum contract ended the LMEs official session at $1,719.50 per tonne, crashing 19 percent below the 2013 high of $2,123 per tonne recorded Feb. 15.
Some attributed the increase in stocks to producers looking to deliver as much excess metal as possible into warehouses before the end of the quarter.
"That (stock) data is posted, which is bearish for LME (prices)," a market observer said. "But its bullish for premiums" because the wide contango that has developed in the market has made warehouse financing deals profitable again, meaning stocks are likely to be unavailable for consumption.
"Its an even better carry than it was a month ago," he said. "So metal is getting tight because people dont want to let it go or unwind their hedges." Demand may not be good, "but people need metal whether business is 50 percent or 100 percent."
The decline in LME prices also has led traders to hold onto aluminum scrap, another supportive factor for P1020 premiums as consumers cant turn to the secondary market for feedstock, other sources said.
"The LME being where it is now doesnt help because anyone who bought scrap on the way down doesnt want to sell it until it goes back up," one trader said.
Concerns about possible smelting capacity curtailments in light of lower LME prices also are supporting premiums in the United States, he added.
A second trader agreed, noting that any meaningful capacity cuts would likely have to come from the West because even as China shuts older production capacity it is bringing on line more modern smelters. "If we stay down another month or two, Im sure (western producers) will consider curtailments," he said.
The second trader said that while his company had seen limited spot activity this week, it has seen strong interest in fixed-forward business into 2014 or beyond as buyers look to lock-in current low prices. "We are at close to four-year lows on LME aluminum prices, so everyone is taking advantage of it," he said.
A third trader said that high premiums also were a matter of replacement costs. "To buy at 11.75 (cents) and sell at 11.75 (cents)and we pay cashmeans we dont make any money," he said. "So the consumers have to pay more or (traders) will hold onto metal units and not sell them. No one is getting discounts anymore. ... Maybe discounts will come back, but only if the premiums go up first."