CHICAGO Midwest aluminum premiums have reversed course and inched upward after a court ruling in the United Kingdom prevented expected reforms to London Metal Exchange warehouse policies from being implemented.
The court, which ruled that the LMEs consultation on proposed warehouse policy changes was "unlawful" (amm.com, March 27), means less metal than expected is leaving sheds at the same time that producers continue to scale back output, some market sources said. They pointed to Alcoa Inc., Pittsburgh, slashing output at its operations in Brazil (amm.com, March 28), where drought and resulting energy shortages were already compelling manufacturers to curtail operations.
AMMs spot P1020 premiums jumped to 18.25 to 18.5 cents per pound April 3 after consistently edging down in the weeks before the High Courts surprise decision (amm.com, March 27).
"With the LME change not going through, the queues will remain long ... and that will provide a bit more stability to the premium in the medium term," one producer said, adding that the cutsboth planned and forced by power issuescould see metal from Argentina and elsewhere diverted to Brazil. "It all provides support to the Midwest premium ... and it could be the beginning of a turnaround."
But others argued against reading too much into the High Courts ruling, reasoning that the decision will delay but not stop the LME from implementing reforms. And new reforms could turn out to be more stringent than the ones that had been proposed (amm.com, July 1), they said.
"The LME didnt pack up and run away. Its just been pushed down the road three to six months,. ... They could come back with a vengeance," one trader said, adding that if the exchange decides to reduce or eliminate rents, for example, it will push metal out of sheds more quickly than under the previously proposed changes.
That uncertainty over the LMEs policies and how they might impact the market is keeping consumers on the sidelines, some market sources said. LME prices, which are at their highest levels in recent months, are also slowing spot demand, they noted.
The London Metal Exchanges cash aluminum contract ended the official session at $1,810 per tonne April 4, off 1.3 percent from $1,833.50 on the same day last year but up 10.3 percent from a recent low of $1,641.50 per tonne Feb. 4.
"The premium is already high, so how much higher can it really go?" a second trader asked. "And LME prices are not conducive for consumers coming back into the market, so theyll just sit out unless they need the metal."
With the jury out on what the LME might propose, competing theories on price trends have emerged, market sources said. One is that premiums will rise on long warehouse queues and production cuts, and could potentially spike if consumers stay out of the market for too long. Another is that they will rise in a knee-jerk reaction to the High Courts ruling before resuming their downward course, especially given the increased risk of financing metal at high premiums.
"My general sense is still that Midwest (premiums) will be coming down," one consumer said.