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Midwest premiums said on shaky ground

Keywords: Tags  aluminum, Midwest premium, P1020, LME, London Metal Exchange, warehouse rules, Michael Cowden

CHICAGO — Midwest aluminum premiums held mostly steady in the past week but remain pressured as debate lingers over when—and to what extent—they might fall due to proposed changes in London Metal Exchange warehousing rules.

While concerns have been raised about the impact of the LME proposal, aimed at reducing long lines at some warehouse locations (, July 1), market sources agreed that a cap had been placed on premiums until the effects are clear.

AMM’s spot premiums for P1020 remain unchanged at 11.75 to 12 cents per pound.

"Premiums are going to be under pressure. There’s no question about it. But it probably won’t happen overnight. All we know is (premiums) aren’t going to go any higher," one market observer said, adding that primary scrap grades are in short supply and buyers are hard-pressed to find prompt metal at a discount.

The market is essentially in a standoff, he said, noting that while the LME rules haven’t been ratified, cautious consumers want to buy spot rather than even one to three months forward.

The new rules, if implemented, wouldn’t come into effect until April 2014 (, July 11).

"Now it’s up to the traders. How do they unwind their positions?" the market observer said. "It’s going to be a matter of greed. Who is the first or second guy out to make the killing and possibly sell at a discount and leave the others with the problem of what to do with their metal?"

Business has been quiet because of a traditional summer slowdown and as market players digest the proposed LME rules, one trader said. "You have to trade your book like (the LME) is going to take action," he said, noting that an LME-related premium drop could lead to production cuts. "Either way you look at it, this takes metal units out of the Midwest."

Even the Midwest premium swaps market has "gone completely quiet," with buyers pulling back because they see the "writing on the wall" about premiums sliding, a second trader said.

At the same time, sellers—mostly traders and banks—don’t want to quote the Midwest premium in forward months because they don’t want to reveal their expectations, the second trader said. He predicted that a "V-shaped" market could result if premiums and LME prices fall, forcing some producers to shut while metal remains locked away in warehouse deals as the market improves.

A third trader said the market is in a state of paralysis over the proposed rules even as physical business appears to be healthy for mid-July. "No one is complaining. Everyone I speak to says their order books are doing well," he said.

But the biggest change might be that producers no longer have an easy "slam dunk" for their metal if the warehouse rules are adopted, the third trader said. Producers "should be running around checking with consumers about what they need and making some alternate plans for the future. For a long time now, I think some of them have been content to put everything in warehouse and have maybe neglected some of their customer relationships."

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