NEW YORK, Jan 30 -- The U.S. Midwest aluminum premium over the London Metal Exchange (LME) cash price has steadied in the first few weeks of the year, even as domestic demand paused to catch its breath from 2010's strong finish.
Midwest aluminum premiums have ranged from 6.2 to 6.5 cents per lb so far in January, largely in line with the 6.35 to 6.5-cent premium seen in late November and early December.
Surprisingly strong business activity in aluminum-specific sectors ranging from automotive to aerospace to foil packaging ran counter-seasonally at the end of 2010, keeping the premium buoyant and demand prospects bright, analysts said.
"Having the Midwest premium relatively stable right now while we are still in a traditional slow period due to seasonal factors corroborates the fact that underlying demand is doing better than what people were expecting," said Jorge Vazquez, analyst with Harbor Intelligence.
That better-than-expected demand view echoed a Reuters poll of 23 analysts forecasting a narrower supply surplus for this year.
"We believe we are going to reach premiums as high as 7 cents per lb before the end of the first half," Vazquez said.
The Midwest premium is the cost of freight and handling to ship aluminum from LME warehouses to the U.S. Midwest.
Underpinning the premium further is a lack of available aluminum scrap, a market development that exacerbates in winter, dealers said.
"The aluminum business is particularly sensitive to weather," said Marc Kaplan, president of Mews Metals Trading in New Jersey.
"I may have a million pounds of finished product sitting in my yard, but if it's covered with snow and ice, they're not going to take it."
As a result, many consumers will turn to primary metal as a substitute.
"That's what is keeping premiums steady," another dealer said. "They will definitely stay at a 6.2 level, and I think they will go up a little from here."
With global demand prospects for the lightweight metal on the rise, physical market conditions in the United States continue to feel the strain of availability issues at LME-registered warehouses.
From longer-term finance deals to extended lead times for withdrawal at the warehouses, the inability to access metal is a constant headache for consumers in need of prompt material.
At around 4.5 million tonnes, LME warehouse aluminum stocks are not far from record highs above 4.6 million tonnes, but much of that material is bound up in financing deals.
Deutsche Bank (DBKGn.DE: Quote) this week said it held around 2 million tonnes of aluminum in financing deals.
"Financing deals are definitely there and are not going away any time soon," one Midwest physical dealer said.
"The premiums are holding in Detroit at $120 (per tonne) plus, so that business is going to continue, which will obviously tie up metal," he said.
Aluminum inventories in the big three LME warehouses in the United States -- Chicago, Baltimore and Detroit -- have seen divergent metal flows this year.
Chicago and Baltimore have seen rates drop by 54 percent and 22 percent, respectively, from their 2009 peaks, while Detroit has continued to accumulate material. Stockpiles there hit a record peak above 1 million tonnes in January.
"It's a Detroit-centric market at this point," the Midwest dealer said. "It's the only LME material available in a four- to six-week timeframe ... Baltimore is tied up on rent deals and the majority of what's in Chicago is either tied up or there is a high warrant premium."
An LME rule that limits deliveries of aluminum from exchange-monitored inventories to 1,500 tonnes daily for each warehouse company and each location tightened conditions that much more.
"There's really only one warehouse you can get metal out of, which is only so many tonnes per day," the Midwest dealer said of the Detroit warehouse.