Record surge in U.S. aluminum premiums rattles end-users

FORT LAUDERDALE Tue Jan 14, 2014 7:01pm EST

FORT LAUDERDALE Jan 14 (Reuters) - The unprecedented surge in U.S. aluminum premiums to record highs has renewed concerns about the dwindling supplies and rising costs of a key raw material for automotive and beverage can makers, even as the market struggles with big stockpiles.

The U.S. premium for aluminum, paid on top of the London Metal Exchange for physical delivery, surged 45 percent in a matter of days last week and is holding record highs around 17.5 cents per lb.

The jump has mystified General Motors Co, one of the biggest end-users of aluminum.

"I've not heard a convincing reason for the premium," Saber Haidous, global commodity manager for GM, said at the Platts aluminum symposium on Tuesday.

His comment reflects widespread confusion in the market that has brought spot activity almost to a halt and unnerved consumers, who have complained that high physical prices are costing the industry billions of dollars.

The premiums are "artificially high," Jim Makki, Novelis vice president of North American operations, said at the conference. "We're very concerned about the pick-up in the Midwest premium."

In recent years, the world's top flat rolled products maker, which supplies Coca Cola and other big beverage can makers, was one of the biggest critic of the LME over its handling of the crisis surrounding its warehousing policy.

Novelis and other end-users have complained that LME rules inflated physical prices and distorted supplies.

Under regulatory, legal and political pressure, the LME has announced plans to increase sharply the rate of deliveries from warehouses with long wait times and big stockpiles, a move that is expected to put pressure on premiums.

Traders agree that the rise in premiums was due to a steady dwindling of spot supplies and small delays in deliveries caused by the cold spell in the U.S. industrial heartland.

Availability has tightened as low interest rates and a wide forward price structure keep millions of tonnes of metal locked up in financing deals, while producers have cut output and a small but important smelter, Ormet Corp, closed last year.

Estimates on the size of the stockpile stored outside the LME range from 4 million tonnes to 15 million tonnes.

NOT A FLASH IN THE PAN

For now, premiums are holding firm and merchants have been speculating if it will lure more metal from Russia, the Middle East, or even Europe.

"It doesn't seem to be a flash in the pan. We'll see how long it lasts," said INTL FCStone analyst Ed Meir at the conference.

The United States, a net importer, is having to compete for aluminum with Mexico and Brazil, which traders say are also short because of lower production in the region.

"The big question everyone's asking is what will happen to imports?" said a U.S. trader.

Premiums would have to stay elevated for weeks or months before traders divert metal to the United States. Many hope European and Japanese premiums will follow the U.S market higher.

First quarter premiums for Japan, Asia's No. 1 importer, were set at a record $250 per tonne.

Some traders might not renew financing deals if premiums are more appealing.

"Why not just make a quick buck while you can? The premium's a better return than the contango," said the U.S. trader.