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Midwest P1020 aluminum premiums tumble

Keywords: Tags  Aluminum, Midwest premiums, P1020, CFTC, LME, lawsuits, banks, warehouses Michael Cowden

CHICAGO — Midwest aluminum premiums tumbled this week due to uncertainty about the potential fallout from increased regulatory scrutiny of U.S. banks’ physical commodities businesses, warehousing policies and the potential for increased market volatility.

AMM’s spot premiums for P1020 dropped to 11.4 to 11.85 cents per pound from 11.7 to 12 cents previously.

“Everyone is very cautious,” one trader said. “Premiums have definitely been capped. How quickly they will come down and how much is still in question.”

The trader and other market sources had several concerns, chief among them a rumored U.S. Commodity Futures Trading Commission (CFTC) probe into big banks and warehousing firms (, July 22).

The CFTC declined to comment to AMM or confirm an investigation. Banks and warehousing companies that have reportedly been issued subpoenas also declined to comment.

Market sources are also concerned about publicity surrounding Senate criticism of banks’ ties to physical commodities trading and warehousing (, July 23), several class-action lawsuits (, Aug. 13) and questions about how both banks and regulators might respond, though some also said the lawsuits are frivolous and unlikely to impact the market.

A second trader pegged 2014 offers at premiums of 11 cents or lower.

Also pushing premiums down was a first trade of the CME Group Inc.’s aluminum premium swaps contract (, Aug. 10), several trader sources said, adding that the deal was transacted at a premium of about 10 cents for November and December 2013.

“Anyone looking to sell is going to have to meet buyers’ expectations that Midwest (premium) will go down and their insistence that sales be at a discount, maybe a hefty one,” a third trader said, noting that buyers were also hesitant given recent increases in aluminum prices but longer-term uncertainty about the direction of the market.

The CME did not confirm the rumored 10-cent premium to AMM.

Other traders, however, questioned whether the market might be making too much out of one trade of limited tonnage, contending that aluminum prices are poised to rise because of announced and expected capacity cuts, better economic data out of China and elsewhere, and a tight domestic market in some regions, especially in the southeastern United States.

The cash aluminum contract ended the London Metal Exchange’s official session at $1,835 per tonne Aug. 14, up 6 percent from $1,731 per tonne Aug. 7 but off 13.6 percent from a 2013 high of $2,123 per tonne on Feb. 15.

The aluminum market has also been characterized in recent weeks by an uptick in offgrade material, sources said. Offgrade material is traditionally more readily available in the summer because anodes need to be changed more often in warmer weather, they said. If anodes are not changed, chemistries may deteriorate, leading to more offgrade production than anticipated, they said.

But while some market sources said discounts for offgrade material had widened as sellers looked to offload material into a falling market, others said the spreads between offgrade material and P1020 were unchanged or, in some cases, tighter than in past summers.

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