CHICAGO Midwest aluminum premiums may slip from current high levels but are unlikely to crash, according to Century Aluminum Co.s top executive.
The Midwest premium is currently "just shy" of 20 cents per pound compared with 10 to 12 cents in December, Century president and chief executive officer Michael Bless said during a conference call with analysts after the release of earnings data Feb. 20.
"We are not planning on these types of elevated levels to persist," Bless said. "But we do believe that there are some structural changes that will support premiums comfortably above historical levels." European duty-unpaid aluminum premiums also are up significantly, he said.
The Chicago-based aluminum producer thinks premiums have been bolstered by a tight scrap market, financing deals and strong demand, especially from the automotive sector. The spike in early 2013 was also driven by consumers whoexpecting lower premiumsput off metal purchases, Bless said. "When those (lower premiums) didnt come, the situation began to feed on itself."
The increase in premiums also comes as demand has ramped up while smelter shutdownsenacted or announcedin the United States, Europe and Australia have or will lead to cuts in supply, Bless said. "Were also starting to see some real capacity come out of China, although still not at the levels we need."
As a result, the fourth quarter saw global demand outpace supply growth, Bless said, and "most forecasters are now calling for a deficit in 2014 on a global basis and certainly by 2015."
But while market forces drove premiums up, they also could push them back down, Bless said. "The art is going to be deciding when and to what extent those premium movements happen."
Premiums likely wont return to historical averages of 5 to 6 cents per pound but could face "near-term headwinds," Morgan Stanley Research analysts said in a note Feb. 20. Premiums could slip as warmer weather arrives and more scrap becomes available, they said.
In addition, the Midwest premium is 4 cents per pound above those in Europe and 13 cents above those in China, which should make shipping material to the United States more attractive, the analysts said. In addition, financing deals could become less attractive thanks to record spreads between spot premiums and contango encouraging spot sales, they said.