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Aluminum premiums to hold firm: Davenport

Keywords: Tags  Davenport & Co., Lloyd O'Carroll, John Ockerman, aluminum, production cuts, LME, European recession, Midwest premium aluminum prices


CHICAGO — Production cuts announced by aluminum producers won’t be enough to offset tepid aluminum demand this year, although regional premiums should continue to climb, according to Davenport & Co. LLC analysts.

"Producers are coming to terms with low aluminum prices—finally. However, the majority of these cuts have yet to be implemented," analysts Lloyd T. O’Carroll and John F. Ockerman said in a June 27 note to investors.

Aluminum prices will fall this year but should improve in 2014 thanks in part to slowing demand growth being offset by global production cuts, the analysts said, and aluminum demand should grow significantly over the next 10 years largely due to increased auto industry demand for aluminum body sheet.

London Metal Exchange cash prices for aluminum will drop 4.6 percent this year to an annual average of $1,926 per tonne before rebounding to $2,225 in next year and $2,375 in 2015, O’Carroll and Ockerman said.

Domestic aluminum producers could see anticipated profits narrow or even swing to losses as a result of lower aluminum prices, the analysts said. Despite current low aluminum prices, regional premiums "should continue their uninterrupted march higher" over the next 12 to 18 months because of wide contangos on the LME, which should attract more metal into financing deals. U.S. Midwest premiums could reach 15 cents per pound in late 2014, they predicted.

AMM’s Midwest premium is currently 11.75 to 12.25 cents per pound.

But the analysts warned that higher premiums may not be an unmitigated blessing for producers, especially over the long haul. "Higher premiums are cushioning the blow of low prices for aluminum producers," they said. "While this is beneficial in the short term for earnings, it has kept more production online than would have otherwise occurred, leading to a more-prolonged price downturn."

But the current drop in LME prices might "accelerate" the announcement of production cuts in 2013, O’Carroll and Ockerman said. While tighter supplies and improving demand should bolster prices in the longer term, "stock financing should act as a soft ceiling on prices and prevent swift, sustained price improvements."

Alcoa Inc. has announced plans to permanently close two older potlines at its Baie-Comeau smelter in Quebec and postpone by three years the construction of a new potline as the company looks to cut costs (amm.com, May 16). The Pittsburgh-based aluminum company has said it is considering cutting up to 460,000 tonnes of smelter capacity by August 2014 as aluminum prices remain low (amm.com, May 1).

The European recession and slow growth in China have weakened demand at the same time that the market is exhibiting "negative sentiment" toward commodities in general and aluminum in particular, O’Carroll and Ockerman said. "We expect this will continue to be the status quo."


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