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Aluminum premiums fall on LME changes, bearish view

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

CHICAGO — Midwest aluminum premiums dipped last week due primarily to proposed changes in London Metal Exchange warehousing regulations.

AMM’s spot P1020 aluminum premiums dropped to 10.5 to 11 cents per pound Aug. 28 from 11 to 11.25 cents previously.

Market sources generally said they expected the decline to continue, with some predicting that contract negotiations could be delayed until after the LME’s fall dinner in early October, after which the new rules are expected to be promulgated.

Some trading companies were said to be aggressive sellers, looking to offload metal at premiums of 9 cents or less for 2014 contracts due to expectations that premiums could move to or below those levels by year-end, market sources said.

"There is no longer a backstop ... so there is plenty of room for premiums to drop," one trader said. "As soon as the LME changed the rules, the game was over. The premiums aren’t going up any more. ... The incentives that were being paid can’t be paid anymore."

Premiums should never have risen as high as they did, the trader said, predicting that they could fall another 2 to 3 cents per pound. However, he cautioned that cheap financing means it is unlikely metal will flood the market.

"We’ve gone back to fundamentals," he said. "And it’s not fun on the way down, it’s only fun on the way up. ... So we’re a bunch of boring traders now."

Many buyers continue to look to purchase metal on a formula based on future premiums rather than locking in a fixed premium because they expect prices to continue to tumble, market sources said.

The LME’s proposed rules, announced this summer, aren’t expected to go into effect until April 2014, although market sources said the impact is already being assumed in current aluminum prices and premiums.

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