aluminum premiums may begin to fall back to earth as producers,
traders and banks court physical consumers whose short-term
requirements have already been met, market sources said.
spot P1020 premium range weakened slightly to 20.5 to 21 cents
per pound Feb. 5 from 20.75 to 21 cents previously.
spiked to new highs this year as consumers scrambled for metal
said to be in short supply because of production cuts and
"disciplined" sellers who had leverage to demand premiums on
top of a Midwest premium.
But such extra
premiums, said at the time to be necessary to cover replacement
costs, have now gone from the market as consumers and some
suppliers question whether replacement metal might instead cost
less in the future than it does today.
While some consumer
sources reported paying a 21-cent Midwest premium for spot
metal, others said they faced little resistance when they
refused not only to pay extra premiums but also when they
insisted on a lower Midwest number.
"The higher Midwest
(premium) really corrected the issue of metal availability,"
one consumer source said. "Producers and traders are now very
willing to sell ... and that wasnt the case that long
Metal is readily
available in part because the unprecedented speed of Midwest
premium increases pushed consumers to buy ahead as a physical
hedge against possible further moves upward, market sources
said. As a result, many consumers have already purchased their
metal requirements for the balance of February and perhaps
beyond, they said.
"There is very little
interest in buying prompt," one trader said. "Sellers abound
and buyers do not. Sellers still want to maximize the premium,
but theyre facing a lot of resistance because consumers
just dont need the metal."
The trader reported
selling offgrade metal at a standard 1-cent discount to
published Midwest premiums but also losing a spot P1020 sale in
the 20-cent range. It might have been an isolated incident, he
said, but it also could indicate that Midwest premiums are
poised to fall into the teens.
"I think (the Midwest
premium) has peaked," the trader said. "But its tough to
gauge the exact (Midwest premium) number when there isnt
much interest. ... If consumers have any discretionary buying,
they dont feel any rush to do it now. Theyre
content to wait."
Suppliers also are
looking to reduce their exposure to Midwest premiums that now
represent a historically high portion of all-in metal costs,
market sources said.
The cash aluminum
contract ended the London Metal Exchanges official
session Feb. 5 at $1,663 per tonne (75.4 cents per pound). That
means a Midwest premium of 20.75 cents per pound would account
for 21.6 percent of all-in metal costs of 96.15 cents. That
premium risk is largely unhedgeable, some market sources
The increased risk
makes financing deals less attractive than selling to physical
consumers, they said, noting that the real shortage may now be
buyers interested in purchasing material.
sitting on inventory, you either have to finance it with a lot
of premium risk or sell it in a downward-moving market," the