aluminum premiums continued to strengthen amid wide contangos
on the London Metal Exchange even as market participants
questioned whether changes to LME warehouse policies could push
premiums down in the futurepotentially dramatically.
Midwest P1020 premiums inched up on the low end to a range of
12 to 12.25 cents per pound July 3 from 11.75 to 12.25 cents
"Right now we are
mostly transacting over 12 (cents). But then there is the LME
announcement that everyone is evaluating," one producer source
said. "It is new information, and the market is still trying to
digest it. However, the knee-jerk reaction is that it will have
a downward effect on premiums."
Under new exchange
proposals, LME warehouse companies will be required to deliver
out more metal than they draw in at storage locations with long
load-out queues (amm.com, July 1).
One possible impact of
such proposed policies: warehouses may reduce incentives used
to attract metal, potentially removing an important "anchor" to
the aluminum market and to higher premiums, the producer source
said, echoing the sentiment of other market players.
Premiums continue to
angle upward thanks to support from a "robust" contango, one
trader said, noting that his company was looking tobut
hadnt yet transactedbusiness at a Midwest premium
of 12.5 cents per pound.
"But on a forward
basis, with the LME rules coming out, there is a little more
caution on whether premiums can be maintained," he said. If
warehouses are required to ship out more metal than they take
in, it likely will lead to reduced incentives and thus lower
premiums, he added.
In the meantime,
its business as usual, the trader said. "Premiums are
very well supported because those that have the (metal) units
can earn money with the contango and will do so. Just
keep it the way it is is the attitude many of them
proposed rules might be the biggest news in a week that saw
little spot activity due to the Independence Day holiday, one
market observer said, characterizing the market as "spooked" by
the proposed policies. "People are a little bit more anxious
about next year. Some of the traders are maybe looking to get
out of their positions ... so there is a little discussion of,
Hey, Im interested in selling you next year at more
reasonable premiums, " he said.
A second trader
cautioned that it was too early to say what the change might
mean for the market, but expects lower warehouse incentives and
Midwest premiums, backwardations and perhaps producers reducing
output as metal pours into a market lacking enough demand to
absorb it. "Im sure that (warehouses) are going to be
dramatically dropping (incentives). ... I wouldnt be
surprised to see them soon saying they wont pay anything
to take metal in if (the proposed LME changes) come to
As spreads narrow and
move into backwardation, financing to hold metal in warehouses
will become scarce, the second trader said. "People wont
be able to hold onto the units, and that will have an impact on
LME warehouses held
more than 5.4 million tonnes of aluminum as of July 3, of which
nearly 1.5 million tonnes were in Detroit. This tops annualized
output of some 5.04 million tonnes for the United States and
Canada through May, recent Aluminum Association data show (
amm.com, July 5).