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Demand behind aluminum premium rise: Smith

Keywords: Tags  Noranda Aluminum, Layle Smith, Midwest premium, London Metal Exchange, LME, Novelis, Ormet, aluminum prices aluminum


CHICAGO — Midwest aluminum premiums have gotten a boost from strong demand and bankrupt Ormet Corp.’s closure of its Hannibal, Ohio, smelter, according to Noranda Aluminum Holding Corp.’s top executive.

"If you look at the trend in the Midwest premium from the time of announcement of the closure to today, it’s a pretty illuminating story," president and chief executive officer Layle K. "Kip" Smith said in an earnings call Feb. 19.

Ormet in October said it would stop output at its 270,000-tonne-per-year smelter (amm.com, Oct. 4). AMM’s spot P1020 premium was at 20 to 20.5 cents per pound Feb. 18, more than double the 9.5 to 10 cents per pound Oct. 4.

Franklin, Tenn.-based Noranda doesn’t provide a forecast on the Midwest premium, Smith said. However, "you could draw your own conclusion from that data," he told analysts.

Ormet’s Hannibal smelter made up about 10 percent of U.S. primary aluminum capacity, Smith said. "When you take 10 percent of the primary capacity out, it reinforces our belief that, in the end, pricing is all about demand. ... And so if you’ve got strong fundamental demand and a step-change in capacity, it typically puts upward pressure on the premiums."

Aluminum consumers allege in lawsuits that banks, warehousing companies and the London Metal Exchange have conspired to manipulate regional premiums, including the Midwest premium (amm.com, Dec. 17).

But supply-demand fundamentals may be at work. "We think that the behaviors of the premium are consistent with our overall view of pricing philosophy," Smith said, noting that most companies are sure of demand because they know what their order books look like.

"So the stronger the order book, the more support there is for trying to achieve and enhance value for your product," Smith said.

The key to watch in 2014 is U.S. demand and whether it continues at current strong levels, which could support the Midwest premium, Smith said. But if demand tails off, Noranda’s pricing theory "would suggest there would be less support for the prices where they are."

Noranda chief financial officer Dale W. Boyles also characterized current demand as "very positive," noting that historically high Midwest premiums reflect that strength.


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