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Aluminum premiums could fall: market

Keywords: Tags  aluminum, Midwest premium, P1020, LME, warehouses, load out, policy change, aluminum michael cowden


CHICAGO — Midwest 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 future—potentially dramatically.

AMM’s 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 previously.

"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 to—but hadn’t yet transacted—business 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, it’s 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 have."

The LME’s 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, I’m 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. "I’m sure that (warehouses) are going to be dramatically dropping (incentives). ... I wouldn’t be surprised to see them soon saying they won’t pay anything to take metal in if (the proposed LME changes) come to fruition."

As spreads narrow and move into backwardation, financing to hold metal in warehouses will become scarce, the second trader said. "People won’t be able to hold onto the units, and that will have an impact on premiums."

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).


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