Potential tightness in aluminum billet market brewing for Q2

US aluminum billet market sources are bracing themselves for a potential tight market scenario in the next few months, which could leave extruders scrambling for supplies and facing higher upcharges.

Market sources attributed the tightness more to a lack of imports than increased demand.

The wildcard nearby is the expected strength of the South American market and the potential reduction in imports, particularly as the Brazilian market strengthens. Market sources have said that currently about 10-15% of North American supplies are coming from overseas -- South America, Russia, and the Middle East. That is up from 5-6% five years ago.

One extruder said that "both my prime and secondary suppliers are saying metal is going to be tight at least through the first half of the year." But for now, he is getting adequate Russian supplies, "and there seems to be plenty of supply from them. I locked in my upcharges last December and have not heard of anyone going to 11 or 12 cents yet."

The Platts 6063 billet upcharge rose to 10-11.5 cents/lb plus P1020 delivered Midwest as of February 10, up from 9.5-11 cents the previous week and up from more historical levels of 8-9 cents in May 2010.

Another extruder agreed that the tightness is because of lack of imports but said there was "an increase in overall business for extruders. We have been able to increase orders with all our billet suppliers over and above the commitments we had agreed upon last fall."

The extruder said his contracted levels for 2011 with suppliers were higher than last year's. Nevertheless, he did not think upcharges "will take off."

A billet trader said he saw the current market "steadyish" and saw no panic yet. "There are a lot of shorts out there, but they are not coming into the market yet. This could be an issue later," he said. He pegged current billet upcharges at 10.5-12 cents, saying it's "a supply issue. There are no imports." He added that the $120-130/mt incentives the warehouses are offering for P1020 mean producers will continue to produce P1020 rather than billet.

The trader said upcharges could hit 15-16 cents. "I think upcharges will continue to pick up throughout the year due to seasonality," he said.

A remelter said this potential tight situation "is as people had anticipated.

He said there is not enough material in the Gulf "due to South America being red hot, and this is causing metal from the Midwest to move to the South." And in the Middle East, "the taps are not flowing as they should be."

The remelter said the min/max clause on contracts are tighter than they were last year, so that any new business is fresh spot business. "The billet producers will hold their customers to a higher degree of contract compliance this year," he said.

Another remelter said while the market is expected to be tight, "it will not be a market where people cannot get their metal."

He noted that US aluminum extrusion shipments were up 15% in 2010 versus 2009, but they are still far below the levels of 2006. "In any market when demand dropped so much, capacity had to be adjusted. Demand came back faster than supply came back," said the remelter. He said depending on the demand scenario this year, "some customers may not be able to get enough units, but I do not expect that to persist. If that happens and upcharges hit above 14 cents, then suppliers will dig out more capacity."

The remelter said that for that capacity to be turned on, producers need to ensure that demand is sustainable and double-digit upcharges will persist.

An extruder with a casthouse expected the billet market to "remain tight."

There is plenty of billet capacity, it's just that the capacity won't be turned on because of credit issues. Why produce billet and take a high risk of credit. It's smarter to just produce P1020 and dump it in an LME warehouse."

The remelter said he expected extrusion growth of 5-10% this year.

According to Davenport's Equity Research, US aluminum shipments are expected to grow 8.2% in 2011 from 2.2% growth in 2010, and 10.3% in 2012.

On a more bearish tone, a billet producer said he was very surprised to hear of 11-12 cents upcharges. "I am not seeing it," he said. "None of our customers have come to us to say they need more and will pay more."

（source from：platts）