The U.S. Midwest aluminum premium paid above the London Metal Exchange cash price remained at elevated levels in early November as an inability to gain access to warehouse material continued to stifle domestic spot business flows.
Midwest aluminum premiums were seen in a range from 6.35 to 6.5 cents, down a few ticks from summer, when they stood firmly at 6.5 cents, but well above the 5.5-cent level at the end of 2009.
Extended lead times for withdrawal of the lightweight metal from LME-registered warehouses in Detroit helped to underpin the rise in premiums this year, dealers said, as logistical restraints caused significant delays in deliveries of prompt material.
"The warehouses are definitely tied up," one said.
"There are still lead times out all the way to the middle of February at this point in Detroit, so right now the spot business that has typically been there month to month has slowed quite a bit," he said.
A staggering jump in canceled aluminum warrants in Detroit only added to the bottlenecks.
Traders were caught off-guard by a massive 100,000-tonne rise in canceled warrants back in September, which suggested that the material would leave storage for future delivery.
"If you cancel a warrant right now, you don't get it until the end of February," a Southeastern trader said.
"It's not clear to us who did it and why they did it … it's likely not going to a customer. We think it might actually be another warehousing company doing it," the trader said.
LME warehouse stocks of aluminum stand at 4.3 million tonnes -- not far from record highs above 4.6 million tonnes hit in January. MAL-STOCKS
As much as 75 percent of this stockpile is tied up in financing deals, which allow banks to buy nearby material from a producer, sell it forward at a profit, and strike a warehouse deal to store it cheaply for an extended period.
Traders also cited an LME rule that requires registered warehouses to deliver 1,500 tonnes of aluminum per location, per day, as another reason for the slowdown in business.
"Material is tight in the sense that you cannot go and get it out of the warehouse," the first dealer said.
"The financing deals and the LME limit rule that does not seem to be changing is definitely going to keep things tight," he said.
SEASONAL SCRAP INFLUENCE
A tighter availability of aluminum scrap in the winter months should continue to give a firm boost to primary metal premiums into the first quarter of 2011, market players said.
Smelters in need of fresh, dry material tend to turn to the secondary scrap market as a substitute for any weather-related damage to primary metal that lay open in storage yards.
"When the bad weather comes, and a smelter has got a yard full of material that is covered in ice and snow, he can't put that in his furnace, so he has to go out and find fresh material that is dry," said one East Coast scrap dealer.
"They are forced to turn to the scrap market and usually pay up for it," he said.
"Premiums should firm up because of the lack of scrap." （Editing by Walter Bagley）
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