CHICAGO Midwest aluminum premiums held steady this week despite announced reforms to London Metal Exchange warehouse policies and buyer anticipation that tags should tumble in the coming months.
AMMs spot P1020 aluminum premium was unchanged Nov. 14 at 10 to 10.25 cents per pound.
Producer and trader sources reasoned that premiums remained on firm ground because of fair demand, supply cuts and metal remaining locked up in financing deals despite the LMEs move to shorten queues at congested warehouses.
"Theres water everywhere, but not a drop to drink," one trader said, adding that the replacement units of P1020 were expensive despite high warehouse inventories.
A second trader said his company was refusing to sell metal for Midwest premiums below 10.25 cents. "It comes down to who has the metal. And if you have strong hands, you dont have to sell it at a discount," the trader said.
"The initial thought was people would be aggressive sellers. But that just didnt come to pass," he said, noting that even if metal leaves LME-listed warehouses, it can be refinanced in less expensive off-exchange sheds.
Physical demand, and not financing deals, are supporting current premiums, a producer source said, noting that the Midwest premium was more attractive than premiums offered by warehouses.
Strong demand from the North American automotive sector, a nascent recovery in North American building and construction, and supply cuts in South America that are driving up Brazilian demand for North American material are also supporting premiums, the producer said. "Demand has actually been pretty good, especially for the fourth quarter," he added.
But consumer sources questioned the logic of premiums holding steadyor, in some cases, risingin a global market characterized by too much capacity, too little demand and falling aluminum prices.
The cash primary aluminum contract ended the LMEs official session at $1,740.50 per tonne (79 cents per pound) Nov. 14, down 18 percent from a 2013 high of $2,123 per tonne (96.3 cents per pound) Feb. 15.
In addition, LME rules announced last week were more aggressive than expected, which should have weighed on premiums, the consumer sources said.
"It doesnt make sense at all," one consumer said. "But I wouldnt underestimate the ability of traders to rally together to protect their nest egg."
Parties with long positions might be trying to talk up the market, a buyer source said, but agreed that production curtailments and financing deals might be keeping supplies tightat least for now.
Premiums could fall in late 2013 or early 2014 as the date approaches for the new LME rules to take effect, the buyer said. "Banks felt OK doing financing deals because they had a known in the LME if they wanted to get out of their positions," he said. "As these financing deals roll off, it will be interesting to see whether the financial community will have an appetite for risk or whether theyll be looking to get rid of metal."
The LME has shortened the limit on the length of queues it will permit at individual warehouse locations to 50 days from a 100-day limit proposed in July. The exchange expects the proposal to be implemented April 1, 2014 (amm.com, Nov. 7).