Surge in US aluminum premiums may be short-lived with softening looming: analyst

 

 

The Platts US aluminum Transaction premium so far in January has been quite exaggerated, surging to 20.75 cents (to $458/mt) by late January from 12 cents ($265/mt) at the start of January.

 

 

"We expect additional supply of metal to be sold quickly into the region to reap such high prices," Lawrence Capital said. And that additional supply "will come largely from smelters that would normally sell metal into Europe, but instead will redirect output to the US."

 

 

It noted that "another meaningful source of supply will likely come from inventory," specifically metal from stock financing deals that will soon expire.

 

 

"We expect such metal will not be rolled into new deals," it said, explaining that the mechanics of a financing deal are such that "a rising (falling) premium helps (hurts) profits from a cash-and-carry trade. With the premium in the stratosphere, financiers could see their profits earned from the contango on the LME wiped out by a drop in the premium."

 

 

Lawrence Capital said it had expected metal held in financing deals at LME warehouses to go into new financing deals, but moved and stored in non-LME warehouse starting in August. Instead, it will likely go to physical consumers now that the risk to financing has seemingly and suddenly become heightened.

 

 

The most significant factors that could pressure premiums lower are the additional supply of aluminum that will be redirected from other regions, namely Europe, to the US and that stock financiers will stop rolling metal into new cash-and-carry trades as existing ones expire -- even though the contango on the LME remains very attractive to finance metal.

 

 

Bank of America Merrill Lynch said earlier this week that the spike in premiums was driven by a confluence of factors, including that consumers had deferred purchases through the second half of 2013, anticipating that revised LME regulations to ease warehouse queues would ease the market tightness.

 

 

"This did, however, not happen," BofA Merrill Lynch said. "On the contrary, warehouse queues have actually increased, limiting the availability of aluminium for physical buyers.

 

 

"The spike in premia has been exacerbated by a genuine fundamental tightness of the physical market on the back of production curtailments in the US, Europe, Oceania and Latin America," it said. "Taking all of these factors together, we believe consumers were suddenly concerned about metal availability, and those sellers who are long aluminium took to some extent advantage of the sentiment, i.e. the physical aluminium market has seen a classical short squeeze in recent weeks."

 

 

BofA Merrill Lynch added that there is anecdotal evidence that premia are stabilizing, and it believes they will ultimately fall, although this may play out over several months.