Winter Park, Florida 14/01/2016 - The announcement of production cuts has given the CME Group's Aluminum MW US Transaction Premium (AUP) contract a small bump for January through March but participants remain fairly pessimistic about the rest of the year.
The January AUP contract last traded at 8.553 cents, up 0.17 cents or two percent since last Friday; February increased to 8.650 cents, up 0.4 cents or 4.6 percent; and March rose to 8.5 cents, up 0.25 cents or three percent.
The catalyst for for the movement in AUP was the announcements that Alcoa and Noranda Aluminum Holding Corp will curtail a combined 440,000 tonnes per year of production.
Alcoa will permanently close its Warrick Operations primary aluminium smelter in Evansville, Indiana, by the end of the first quarter, it said on Thursday. The smelter, which has capacity of 269,000 tonnes per year, is closing due to low aluminium prices. The rolling mill and power plant in Warrick will remain online.
Noranda, meanwhile, has idled two potlines with combined capacity of 175,000 tonnes per year at New Madrid, Missouri, following an electrical supply circuit failure.
But the futures indicate that the impact from these two cuts will be minor and temporary. Further out, the AUP forward curve remains backwardated - April through December are still around 8.25 cents.
This suggests growing concerns about demand in the second, third and fourth quarters. Not only has the Federal Reserve started raising interest rates but the manufacturing sector has shown signs of cracking.
The Institute for Supply Management (ISM) manufacturing PMI came in at 48.2 for December, lower than the 48.6 recorded in November and also below the estimated 49.0. Any number below 50 indicates contraction.
Economic activity in the Midwest fell at its fastest pace in more than six years in December, according to the Chicago PMI, which declined to 42.9 from 48.7 in November.
"The year begins with manufacturing activity shrinking and, looking further in the data, the shrinkage looks to be increasingly sourced in domestic demand rather than exports,” Steve Blitz, chief economist at ITG Investment Research, said in a note.
Given this uncertainty, many US aluminium consumers are holding off on buying spot metal until after the Platts Aluminum Symposium that starts next Wednesday in South Florida.
FastMarkets' US Midwest spot premium stabilised this week at 8.5-9 cents per pound ($193 per tonne) but this is still down from six-month high of 9.25-9.75 cents set in late November.
(Editing by Mark Shaw)