CHICAGO Midwest aluminum premiums dropped this week as the summer doldrums, warehouse-policy uncertainty, and bearish sentiment about premiums and London Metal Exchange aluminum prices pushed consumers to hand-to-mouth buying.
"With the LME uptick and discussions that premiums are angling downward, consumers are on the sidelines. ... If you think the LME and premiums are going down, then it behooves you to be conservative on your buy," one trader said.
The cash aluminum contract ended the London Metal Exchanges official session at $1,857.5 per tonne Aug. 22, up 7.3 percent from $1,731 per tonne Aug. 7. But several market sources questioned whether the upward trend was sustainable.
Physical buyers are said to be seeking deep discounts to published Midwest premiums on larger buys, some market participants said.
"If you look at the nearby spreads on ali, how wide they are, you can pick up metal and finance it all the way to next year," a second trader said. "But ... there are no (physical) buyers, so if you were to sell, you would have to lower (Midwest) premiums."
Discounts depend on volume, he added. "For small volume, you are not going to push the premium down against yourself," he said.
That situation has led to a standoff between producers and traders, who are long and want premium support, and buyers refusing to pay higher premiums, market sources said. "Things are in absolute limbo," the second trader said, "Right now, Im primarily seeing sellers, so theyre pushing the premium down on themselves," he added.
Given expectations of falling prices and premiums, those long on inventory could be hit by a big downward devaluation, market sources said.
Consumers are also less likely than in the past to buy metal at fixed premiums, instead preferring to buy material with a Midwest premium based on a formula, they said.
One consumer said he, like many others, is buying metal based on a forward "floating" Midwest premiumessentially the average of the premium for a given month in the future. "I am trying to protect against a falling knife," he said.
"What is indicative of the premium is whether metal is out there trying to find a home, and there is a lot of metal looking for a home," he added.
"Anyone long on metal is a little afraid right now because theyre exposed to an outright premium drop unless theyve found a way to hedge it," the consumer said.