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Battle ahead in aluminum billet contract talks

Keywords: Tags  Aluminum billet, contract negotiations, 2014, spot, premiums,

CHICAGO — Billet contract negotiations for 2014 could be difficult as the outlook clouds just as talks begin and spot premiums slip on weaker-than-expected demand and abundant metal availability.

AMM’s billet premium range dropped to 10.75 to 12.25 cents from 11 to 12.50 cents previously.

"At the moment there is surplus metal," one consumer source said. "And when you look at overall demand, it’s not as strong as some people had hoped it would be." Producers may try to hold the line in the face of increased costs, but the market—and not costs—ultimately determine premiums, he said.

But producers took the opposite stance, contending that demand was flat to up slightly and predicted that modest improvements in business levels would continue through the second half of 2013 and into 2014. At the same time the market is slowly improving, production cuts could reduce billet availability, some warned.

Even producers less than bullish on their own business prospects said they couldn’t afford to drop (contract) premiums given tight metal spreads and increased energy costs. "Billet consumers have a hunch that there will be more availability this year," one producer source said. "But I’m getting squeezed, scrap spreads are evaporating and so I’ve got to hold the line."

Remelters face higher costs not only because of a tight U.S. scrap market but also because some have been pushed into buying P1020 as a scrap substitute, which is more expensive than scrap and also requires buying alloys such as magnesium that are ordinarily contained in used beverage can (UBC) feedstock, producer sources said.

Meanwhile, P1020 producers might look to offset eroding Midwest premiums with by boosting billet premiums, billet producers said, although some questioned whether such a trend would develop if aluminum prices on the London Metal Exchange continue to improve. Several market sources argued that billet premiums would likely remain unchanged in 2014.

"Remelters won’t reduce premiums because of scrap spreads and a low LME (aluminum price) means primaries can’t afford to reduce them either," one trader said.

The divergent outlooks held by producers and consumers could lead to tense contract negotiations, which are already under way but are expected to heat up in September, market sources said. Discussions could be more rancorous those in 2012, when market participants sometimes worried more about supply than premium given expectations of a strong 2013 demand and a potential billet shortage resulting from a labor disruption at Pittsburgh-based Alcoa Inc.’s majority-owned Aluminerie de Bécancour Inc. that never happened (, Feb. 22), they said.

"Last year was arm wrestling. We’re punching this year," the producer said.

While some market sources said they were only beginning to put together budgets and forecasts for 2014, others said they had already started talks. Most said they expected discussions to conclude at or before Institute of Scrap Recycling Industries Inc. and Aluminum Extruders Council meetings in mid-September in Chicago or by early October at the latest.

A second producer source noted that the situation contrasts last year’s, when he concluded most contract talks shortly after Labor Day.

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