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Midwest aluminum premiums dip slightly

Keywords: Tags  aluminum, Midwest premium, P1020, premium risk, London Metal Exchange, LME, Michael Cowden

CHICAGO — Midwest 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.

AMM’s spot P1020 premium range weakened slightly to 20.5 to 21 cents per pound Feb. 5 from 20.75 to 21 cents previously.

Midwest premiums 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 wasn’t the case that long ago."

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 they’re facing a lot of resistance because consumers just don’t 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 it’s tough to gauge the exact (Midwest premium) number when there isn’t much interest. ... If consumers have any discretionary buying, they don’t feel any rush to do it now. They’re 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 Exchange’s 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 said.

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.

"If you’re sitting on inventory, you either have to finance it with a lot of premium risk or sell it in a downward-moving market," the trader said.

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