Benchmark U.S. Midwest spot aluminum premiums rose above 10 cents a lb for the first time as a persistently strong spread between cash and forward prices on the London Metal Exchange continued to tie up the metal in the warehouses.
The record-setting premium was also attributed to a pick-up in demand following a sharp drop in the price of aluminum on the London Metal Exchange (LME) in April, market participants said, expecting this one-two punch to provide further upside in the price.
"We are in uncharted territory at a record high. I have no idea how far it can go ... no one does. That's part of the concern I would have if I were a consumer. What's keeping it from going to 11 or 15 or 20 cents? Nothing," a trader said.
The Midwest premium, the benchmark used for physical trading of aluminum in North America, rose to a record range between 9.75 cents and above 10 cents per lb, with some traders quoting as high as 11 cents for prompt delivery.
"Bids are 9.75, offers are over 10 if you can find it," said one physical dealer.
"The contango is in place and people are holding metal. The people that need to buy that metal are going to have to pay a price that the holders find acceptable for a return on their investment."
Cash aluminum traded on Tuesday at a $40 per tonne discount or contango against the benchmark three-month contract MAL0-3, versus the $22.50 discount seen at the start of the year. Three-month prices on the LME were at $2,063.00/$2,063.50 per tonne in Tuesday's official session, down $3 per tonne on Friday. The LME was shut for May Day bank holiday on Monday.
"The banks have no incentive to sell because they are making so much. The contango is around $40 cash to three's ... they can make money all day long. Why sell it?" the physical dealer said.
Buyers also stepped up their aluminum purchases after prices slipped last week to their cheapest in more than four months. Benchmark LME aluminum futures fell to $2,050 per tonne, a low dating back to early January.
"It further stimulated demand," a second trader said. "We are doing very healthy volumes at between 10 and 11 cents, and we've been trading at that level for the last couple of weeks."
On top of the improved demand, supplies remained constrained as tonnages continue to be locked up in the warehouses under pre-arranged financing deals, participants said.
"Producers have already committed their production tonnages ... to the banks who have already committed for the year, and paid huge incentives," the first trader said.
"They're locked in already."
Incentives are paid by warehouses to traders to store the metal in their facilities. While the warehouses earn money on the rent, investors are willing to leave it in storage because forward aluminum prices are higher than cash.
"In North America, all of the free-flowing material is coming out of Detroit, and most of that is just going from warehouse to warehouse. The new warehouse owner is going to hold on to it and hold the market at ransom, so to speak," the trader said.
More than 1.4 million tonnes or abut a third of total LME aluminum stocks are stored in Detroit, with significant volumes waiting to be delivered out.
The wait time to get material out of Detroit is up to ten months, market participants said.
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