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Midwest aluminum premiums steady

Keywords: Tags  Midwest premium, spot premium, P1020, Davenport & Co., Lloyd O'Carroll, John Ockerman, Lawrence Capital Management, Timothy Hayes F-150


CHICAGO — Midwest 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.

AMM’s 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 O’Carroll 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.

In addition, "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 won’t be able to keep putting off replacing their jalopies," Hayes said.

Some suppliers saw no reason to part with metal at lower premiums. "If you’re trying to sell 5,000 tonnes, the premium won’t be 10 cents," one trader said. "But if it’s 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 2014—most transacted at a floating premium—are 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 shouldn’t impact floating premiums—or the U.S. government shutdown, which he predicted would be short-lived.

But others cautioned against underestimating the impact of gridlock in Washington. "With the shenanigans being played by the Congress, who knows what’s next?" one trader asked. "This thing could fizzle out tomorrow, but it could also get really, really ugly."


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