NEW YORK, Aug 18 (Reuters) - Lackluster physical aluminum demand this summer has poured some cold water on the rally in
U.S. Midwest spot premiums this year, dragging them down to a four-month low near 8 cents per lb.
Domestic aluminum demand tends to cool off in the July to September period, but this season's lull may be more pronounced
as the economy suffers through another soft patch and metal-intensive industries like housing and manufacturing struggle to grow.
Still, physical market participants expect premiums to find their footing near the 8-cent level and gravitate higher over
the course of the second half of the year, as the prospects of a lower interest rate environment and contango in the forward curve keep bank financing deals firmly in place.
"There is absolutely no reason for it to go down as long as interest rates are staying as low as they are and there is no backwardation," said one East Coast dealer.
Cash prices of aluminum CMAL0 on the London Metal
Exchange (LME) stood Thursday at a $34 discount - or contango-- against the benchmark three-months futures price CMAL3,
down from a $22.50 premium in May.Traders quoted the Midwest premium paid above the LME cash price at 8.1 cents this week. This is down about 15 percent
from a record 9.5 cents in May, when incentive-based finance deals spurred producers to unload their metal straight into the warehouses.
"These finance deals will continue. The warehouses are still paying upper $130's to lower $140's for incentives into Detroit," said a second trader.
In a typical deal, a bank buys aluminum from a producer,agrees to sell it at some point in the future at a profit, and strikes a warehouse deal to store it cheaply for an extended period of time.
"The premiums will go up only because the warehouses will be even more aggressive in giving higher incentives now that they see low interest rates being promised by the Fed," the East Coast dealer said "They have very little risk."The Fed pledged to maintain rates at rock-bottom lows until mid-2013 in an effort to revive a flagging economic recovery.
LME LOAD-OUT RELIEF?
In a bid to unblock delivery delays at some of the larger warehouses it monitors, the LME decided last month to double the load-out rate to 3,000 tonnes per day for warehouses that hold more than 900,000 tonnes in any single location.
Nowhere have these delays been more prominent than in Detroit, where roughly one quarter of LME aluminum stocks, or 1.15 million tonnes, are stored.
"The Detroit product stays pretty regional ... it doesn't move too far, but it's quite a bottleneck," said Gary Paul, executive vice president with Cowan Systems LLC, a trucking company with operations in the Detroit area.
"The shortage of trucks is becoming extremely difficult each day. If that's 80 percent of the problem, the other 20 percent is just pulling these types of commodities, whether its copper or aluminum because of the rising insurance costs and theft," he said.
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