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Aluminum supply glut threat said aggrandized

Keywords: Tags  aluminum, contango, Midwest premium, traders, CME Group, London Metal Exchange, LME, Nathan Laliberte


NEW YORK — A narrowing contango in the aluminum futures market could lead to a large amount of the material hitting the physical market, although some industry players said that the threat of a supply glut was being trumpeted by traders at major banks looking to cash in on short-term profits.

The London Metal Exchange primary aluminum contract moved to a contango of $19 per tonne July 28 (amm.com, July 28), the first time it has done so since Dec. 17, 2012, when it was $52.50 per tonne, although it narrowed to $11 per tonne July 30, when the three-month aluminum contract closed the official session at $1,993.50 per tonne (90.4 cents per pound) while the cash contract closed at $1,982.50 per tonne (89.9 cents per pound).

Several physical market traders said that traders at major banks were attempting to give the impression that large amount of aluminum would soon be hitting the market.

"The banks are obviously putting these ideas out there to capture profits," one aluminum trader told AMM. "However, a large portion of this material is locked up and I don’t see anybody at this stage dumping metal."

He said he had not seen a "meaningful amount" of material entering the physical market. "Sure there will be guys who can’t take the pain and sell into the physical market. When you look further forward, however, everyone believes there will be a supply shortage. The spreads have not done enough to inspire massive liquidation. The only way (aluminum) will hit the market is if the banks indicate that they will not finance metal anymore."

Most spreads were already "locked in" months in advance, a second trader said. "Every finance trade in place has predetermined spreads. Just because you have tightness for one or two months is not going to make people run for the hills. The spreads are coming in, going out, coming in. It will absolutely not release a flood of inventory into the market; if anything, the material may just shift to CME (Group Inc.)-approved warehouses."

Midwest premiums are still trending upward, the trader said, adding that he believed "metal is not flowing into the market in any meaningful way."

AMM’s assessment of P1020 Midwest spot premiums currently stands at 19.5 to 20 cents per pound. Premiums have held in a relatively tight range over the past few months after spiking to 20.75 to 21 cents per pound in late January from 11.5 to 12 cents a month earlier.

"Quite frankly, the whole year people have been paying above a 19-cent premium," the second trader said. "We don’t see anything driving those premiums down in the near future."


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