MW Premium Still Held Back By Backwardation

The U.S. Midwest prompt aluminum premium over London Metal Exchange cash prices continues to be held back by backwardation, although observers anticipate it will work higher in the next couple to few months.

A week ago, traders had listed a range of 3.5 to 4 cents, but added that most of the activity was in the lower part of that range.

One trader on Tuesday described activity as quiet, with backwardation continuing to hold back the spot premium to perhaps 3.5 cents.

But for roughly March business, a premium of around 5 to 5.5 cents is being quoted, he said. "This is on the expectation that this backwardation, if it persists, will dry up all of the units on the ground," he said.

But for now, with the backwardation in place, there is a tendency to get rid of inventory.

"Traders are not willing to finance nor carry metal through a backwardation," he said. "Assuming that the backwardation persists, once all of the metal on the ground gets used up, the premium should go up to compensate for the demand. Any one blip in demand should probably drive the premium higher.

"But in the meantime, there is some metal around on the ground. Producers have metal to sell. As long as that persists, the premium will stay where it is."

Jim Southwood, president of Commodity Metals Management, listed a range of 2.5 to 4.5 cents for the aluminum premium.

"If you have a big order, great credit, shipped to a good spot, you're under 3 cents," he said. But for a truckload of metal needed immediately, it could be as high as 4.5 cents, perhaps even higher if a credit risk exists.

"What's crushing the premium on the low end is the backwardation and lack of demand," said Southwood.

This prompts holders to want to get rid of inventory, since they otherwise would have to refinance it at a loss.

Southwood also explained that the premium can be expected to rise going forward. At the moment, he explained, the premium is at or below the replacement cost - the cost of getting metal at a Baltic port, shipping it to a port such as Baltimore or New Orleans, and then delivering to the Midwest.

"The cost of doing all of that is 4 1/2 to 5 1/2 cents a pound," said Southwood. "So we're below replacement cost. That means out in the future somewhere, we have to be above the replacement cost. Because at some point in time, we have to go get new units."

Thus, he said, April quotes are up around 5 to 5 1/2 cents a pound.

The key for the market going forward, he added, is just how weak U.S. demand will be. Normally, seasonal improvement occurs around late winter.

"So the question will be what, if any, seasonal increases are we going to see," he said. "As soon as we see the signs of demand improvement, we have to go get more imports into the country. And when that occurs, the premium is going to go instantly to 4 1/2 to 5 1/2 cents a pound."

LME cash aluminum was officially quoted at $2,909.50 to $2,910 a metric ton Wednesday, or about $1.3195 to $1.3197 a pound.

Inventories of aluminum stored in LME warehouses fell 1,250 metric tons to 721,825 from Monday to Tuesday. Still, the total is up from 701,400 metric tons one week ago.