U.S. aluminum premiums tumble to lowest in year as arb draws imports

U.S. aluminum premiums have plunged by as much as 20 percent in the past week, reaching their lowest in more than a year as imports flood into the last remaining bright spot in a worsening global market.

Premiums paid for physical delivery on top of the London Metal Exchange benchmark have sunk to 14-15 cents per lb this week, the lowest since early 2014, from 18 cents last week as financing deals unravel and demand remains weak.

The decline from record highs above 24 cents earlier this year will provide some relief to can- and car-makers such as MillerCoors and Coca Cola Co. For producers like Alcoa Inc and Rusal, it has removed a major prop to profits as LME prices tumble, increasing pressure to reduce high-cost capacity.

Market participants had expected premiums to fall after the LME introduced much-anticipated rules to reduce queues at warehouses with logjams. In Detroit, the wait time to take delivery of metal is a year and a half.

Still, the scale and speed of the decline have sounded alarms among traders, reminiscent of the dramatic slump in 2008 when carmakers dumped millions of tonnes of unwanted metal in Detroit as sales collapsed at the height of the global economic crisis.

"Asia doesn't need anything. Europe doesn't need anything. There's inventory everywhere," said one U.S. trader.

For traders holding stock, the appearance of a backwardation this month, with cash prices higher than forward, has made financing deals unprofitable. The cash-to-three-month spread was around $9.75 per ton on Wednesday.

The surcharges are tumbling quicker than expected as a wide arbitrage lures material from exporters who might otherwise sell to Europe, where premiums have nearly halved to around $250-$290 per ton duty-paid from records seen in November last year.

In recent months, material has landed on U.S. shores from India in bulk for the first time in more than a decade, adding to the big flows of metal from the Middle East, Russia and Canada.

This week's drop has narrowed the arbitrage with Europe to around $100 per ton, but traders say the cost of shipping metal to the United States may put a floor under premiums in the long term, helping to prolong the arbitrage game.

Estimates range between 8 and 12 cents per lb, which is $180-265 per ton. They are historically still very high.

"Premiums will continue to fall, but not to historic levels because the U.S. is short of aluminum," said David Wilson, metals analyst at Citigroup. He reckoned premiums will fall to 9-11 cents per lb in the second half of the year.

Copyright and Exemption Declaration :¢ÙAll articles, pictures and videos that are marked with "China Aluminum Network" on this website are copyright and belong to China Aluminium Network (www.alu.com.cn). When transshipment, any media, website or individual must list the source from "China Aluminium Network (www.alu.com.cn)". We seek legal actions against anyone that disobey this. ¢ÚArticles that marked as copy from others are for transferring more information to readers, do not represent or endorse their opinions or accuracy and reliability. When other media, website or individuals copy from our website, must keep the source. Anyone that changes the articles' sources will hold the responsibilities for copyright and law problems. We also seek legal actions against anyone that disobey this. ¢ÛIf any articles copied by our website concern the copyright and other problems, please contact us within one week.