US aluminum premiums hit 9 cts/lb; near record high

 

 

The latest increase, spurred mostly by rising warehouse incentives rather than any meaningful pickup in demand, is likely to reignite anger among consumers who will either have to pay up or wait nine months to receive their metal.

 

 

"Whatever wasn't done under contract to consumers for the year seems to be heading to the warehouses, and unless there is some significant premium to bring it in a different direction, it should stay that way," a physical dealer said.

 

 

"For prompt material, you're awfully close to the 9-cent level at this point."

 

 

Incentives are paid by warehouses to traders to store metal in their facilities. The warehouses want the metal because they earn rent on it. Investors are willing store it and pay the rent because forward aluminum futures prices are higher than cash.

 

 

After a dip back to around $130-140 per tonne in the latter part of last year, these cash payments are now as high as $160 per tonne in Detroit, according to market participants.

 

 

That means consumers making products for the construction and automotive industries have to fork out more than that in order to prevent the metal from being lured into those warehousing deals.

 

 

"I'm hearing Detroit is going for upwards of $160, so that gives you 7.25 cents. I recently paid 8.5 cents for cash units, including 30-day terms valued at 40 points ... that equates to 8.9 cents," said one trader.

 

 

Another trader said he completed a transaction this week for several thousand tonnes at 9 cents per lb for a two-week delivery in the Midwest.

 

 

"If you try to base yourself on replacement cost for anything that's been delivered into Detroit, you're probably closer to 9.5 cents," the second trader said.

 

 

The Midwest premium of 9 cents is just shy of the record 9.5 cents hit last May when premiums surged 40 percent in a matter of weeks.

 

 

Current market conditions are similar to last year. Warehouse incentives in Detroit were around $150 per tonne and a nine-month queue had formed there after a rash of high-volume canceled warrants.

 

 

Anyone cancelling warrants in Detroit, where Metro International is headquartered and close to three quarters of total LME aluminum stock is stored, will be waiting until November at the earliest before they take delivery of the metal, traders said.

 

 

On Friday, another 32,625 tonnes of the metal were canceled or tagged for future delivery, falling in line behind the nearly 600,000 units already sitting in a months-long queue.

 

 

Last time round, the delivery bottlenecks spurred some large consumers like Novelis, the world's biggest maker of rolled aluminum products, and Coca-Cola Co. to make formal complaints to the LME over the distorted supply flow.

 

 

The complaints helped pave the way for an increased minimum load-out rate of 3,000 tonnes per day for warehouses with more than 900,000 tonnes of metal in storage, up from 1,500 tonnes previously.

 

 

That rule change will come into effect on April 1, but most market participants say it will not be enough to make a significant dent in the queuing time or to help move premiums from these elevated levels.

 

 

These financing deals are profitable because of the strong contango on the London Metal Exchange (LME) and an ultra-low interest rate outlook.

 

 

In a typical deal, a bank or trader buys aluminum from a producer, agrees to sell it at some future point at a profit, and strikes a warehouse deal to store it cheaply for an extended time.

 

 

Cash prices of aluminum traded Monday at a $42.50 discount or contango against the benchmark three-month contract , nearly double the $22.50 discount seen at the start of the year.

 

 

"There's no incentive for anyone to sell anything at a $40-plus contango. The banks can make a lot of money just carrying it for three months at a time at that level," the physical dealer said.

 

 

Still feeling the impact from the shutdown of two of Rio Tinto Alcan's Canadian smelters, Shawinigan and Alma, the scarcity of metal is even greater.

 

 

Alcan's 100,000-tonne Shawinigan smelter is expected to be back up and running at full production by the second quarter of 2012.

 

 

And with incentives exceeding last year's levels, financing rates remaining low and the contango firmly in place, premiums may have further to rise.

 

 

"As long as traders can continue to roll their metal, the premium can go as high as 10 or 11 cents at this point," a producer source said.