Aluminum Midwest premiums tumble again

CHICAGO — Midwest aluminum premiums edged down again this week due to continued uncertainty over proposed London Metal Exchange warehouse policies and a stalemate between buyers and sellers over where premiums might settle.

AMM’s spot P1020 aluminum premium range dropped to 9.5 to 10 cents per pound Sept. 25 from 10 to 10.5 cents previously. Some market sources reported formula-based contract business at 9 cents or below while others insisted that reported premiums were already too low to be sustained.

Several market players chalked the lull to seasonal factors: consumers needing less metal in the holiday-shortened months of November and December and reluctance to stock up on inventory before year-end.

"It feels like August. It’s just dead," one trader said. "The reality is no one is going to do much if they don’t need inventory and they don’t know what the premium is going to be." There needs to be a tightening in the scrap market—something not likely until the winter months—and a clear decision on LME warehouse rules before premiums can regain momentum, he said.

The LME proposals aim to cut long lines for metal in congested warehouse locations (amm.com, July 1).

Others said that while transactions had slowed inquires had not, blaming the situation on a stalemate between consumers angling for premiums in the single digits and suppliers loath to sell much below 10 cents.

One consumer said his firm hadn’t bought anything recently because it had enough metal and felt no rush to buy ahead given expectations of lower prices and premiums. Suppliers, especially traders, may not have such a strong hand, he said.

"They’re sitting there on long positions, so they’re worried wet about a fall" in premiums and aluminum prices, the consumer said. "The rest of us (consumers) are saying, ‘If I don’t need it, why would I buy it when the probability of a down is bigger than an up?’"

A second trader said he would be happy to sell at 9.5 cents. "Everyone is expecting Midwest less 0.75 to 1 (cent)," he said.

Some of the premiums being reported in the market may be an accurrate reflection of the spot market, especially if those deals are based on a formula, even a relatively simple one, the second trader said. "People are playing games," he said. "You don’t have to report a trade if you don’t do it at a fixed premium. But what’s the difference between Midwest minus three-quarters and nine cents? None."

While some sources said market fundamentals did not support even current premiums, others shot back that premiums might not fall for much longer.

A third trader said his firm was making spot offers at 10 cents and saw no reason to transact anything at lower figures in part because of replacement costs. "If deal sales are being concluded under 10 (cents) and replacement costs are above that, it just makes for sideways, non-trading activity," he said.

The market may be slow at present, but that doesn’t mean premiums will continue to fall, the third trader said. "You can still hold metal and earn contango," he said, noting that continued low financing costs provide ongoing incentive to hold metal.


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