U.S. aluminum premiums jump on bullish outlook
NEW YORK Feb 7 (Reuters) - Midwest spot market aluminum premiums for prompt delivery were up at the start of the year, underpinned by a healthier demand outlook and persistent cash-and-carry deals at the warehouses that have choked off spot metal flows, sources told Reuters.
A series of output cuts last month at various North American smelters further squeezed the already tight market at the start of the year.
With metal scarce, many consumers are in the spot market looking to rebuild depleted inventories ahead of what is expected to be a good year across many aluminum manufacturing industries.
"It's the cut-backs in Canada and the lack of import due to the long-term cash-and-carry deals. In Detroit, you cannot get metal out of it for the first six months of the year ... that's causing an immediate problem," said a physical dealer, who quoted the Midwest premium at 8 cents to 9 cents per lb.
In December, the premium was quoted at 7.4 cents per lb.
The Midwest aluminum premium is calculated by factoring in freight and handling costs when shipping aluminum from London Metal Exchange-monitored warehouses to the Midwest.
"I don't know anyone who's offering lower than 8 cents. We are offering much higher because we can see that by March it's going to be a real problem."
That problem worsened after last week's cancellation of 50,000 tonnes of aluminum warrants in Detroit. Now more than 450,000 tonnes are sitting in a months-long queue, making end users increasingly impatient, and its owner, Goldman Sachs , increasingly profitable.
Cash prices of aluminum on the London Metal Exchange (LME) MAL0-3 traded out to a $42 discount, or contango against the benchmark three-months futures price, suggesting metal will likely continue to be locked up in finance deals.
"The contango is extremely wide ... why sell? You can cash and carry and make a profit. There's no incentive to move anything," the physical dealer said.
Nick Madden, chief procurement officer for Atlanta-based Novelis, the world's biggest maker of rolled aluminium products, said the warehouse financing deals have created a real supply chain threat to the business.
He estimated that if there were no further inflows and if exchange-enforced load-out rates remained at 1,500 tonnes per day, the warehouse would not be empty until summer of 2014, earning Goldman in excess of $200 million in rent.
"It gives you a sense of just how much leverage the warehouses have to generate rents because of the bottlenecks on output," he said.
"The warehouses continue to offer incentives, which we firmly believe props up the premium."
As a result, spot business transactions were tipping the 8-cent level this week.
A physical aluminum trader located in the Midwest said he booked two 100-tonne transactions at 8 to 8.25 cents, delivered for early February.
An extruder quoted business "in the middle to upper end of the 8 to 9 cent range."
"Business seems to be good. From an extruder and billet standpoint, business is pretty good all the way around. I really don't know any extruder that is starting 2012 off slow," he said.
The Midwest physical trader agreed.
"There is less uncertainty in the market. People are optimistic that business is going to be good, so they are not apt to sell it at low numbers.
"They know that business is there so they're going to push the premium." (Reporting By Chris Kelly; Editing by David Gregorio)