aluminum premiums have held their ground despite scattered
reports of discounting along with uncertainty about the length
and potential impact of the U.S. government shutdown.
spot P1020 aluminum premium remained at 9.5 to 10 cents per
pound Oct. 3 despite continued reports of discounting at prices
as low as 9 cents (
amm.com, Sept. 26).
With the market in
contango and replacement costs high, several sources said they
saw no reason to let go of metal for premiums much below 10
cents per pound.
"We believe that
premium bears have triumphantly touted the recent decline in
physical premiums as proof that a double-digit Midwest premium
is unsustainable without warehouse incentives," Davenport &
Co. LLC analysts Lloyd OCarroll and John Ockerman said in
a research note.
But expecting premiums
to return to 4 to 5 cents per pound also means believing that
about 2 million tonnes of North American capacity will be
restarted, the analysts said. Premiums of 8 to 9 cents per
pound are necessary to cover logistics costs to attract metal
to regions with production deficits, such as the United States,
from areas with surpluses, such as the United Arab Emirates and
Bahrain, they said.
"explosive" growth is expected in the automotive industry, with
the amount of aluminum in the average car or light truck seen
rising to 473 pounds in 2017 from 352 pounds in 2012, Lawrence
Capital Management Inc. analyst Timothy Hayes said in a report.
That equates to an increase of 3 to 4 percent per year, except
in 2014 when the average content is expected to jump 17 percent
thanks to Ford Motor Co.s all-aluminum F-150, he said,
predicting that auto output would remain at "respectable"
levels in the coming years.
"The age of the fleet
is an all-time record of 11.4 years. Consumers wont be
able to keep putting off replacing their jalopies," Hayes
Some suppliers saw no
reason to part with metal at lower premiums. "If youre
trying to sell 5,000 tonnes, the premium wont be 10
cents," one trader said. "But if its a small volume, you
are going to pay for it ... There is no point (in discounting)
if you look at the nearby spreads. You are still getting paid
to hold metal."
Still, some market
sources warned against too much optimism.
One producer source
said deals for 2014most transacted at a floating
premiumare coming in slower than expected. "There are
some uncertainties about requirements because there is a bit of
uncertainty about business for next year, so that is causing
some customers to delay," he said.
The producer brushed
off the notion that the uncertainty might be related to London
Metal Exchange policy changes (
amm.com, July 1)something that
shouldnt impact floating premiumsor the U.S.
government shutdown, which he predicted would be
But others cautioned
against underestimating the impact of gridlock in Washington.
"With the shenanigans being played by the Congress, who knows
whats next?" one trader asked. "This thing could fizzle
out tomorrow, but it could also get really, really ugly."