Winter Park, Florida 03/02/2016 - The conditions are in place for another wave of aluminium imports to the US, which could have a major impact on physical premiums in America, Europe and Japan.
The US has again emerged as the premier market for aluminium. Not only does the country have the best demand profile due to its booming automotive and aerospace sectors but high costs and a strong dollar have also forced many smelters to close. Alcoa, Century and Noranda have all announced production cuts recently.
This year, the US will consume more than 5.5 million tonnes of primary aluminium but will produce less than 1 million tonnes at a handful of smelters.
So the recovery in the US Midwest premium by 36 percent in four months to 9.25 cents per pound or $204 per tonne this week comes as little surprise.
The second factor at play is the significant tightening of London Metal Exchange spreads. Cash-threes and cash-March are both backwardated at $3.25 and $7.00 respectively.
The lack of a near-term contango makes cash-and-carry inventory less attractive. This could force some material into the consumer market, some of which might head to the US.
Third, premiums in Europe have been trending lower. In-warehouse Rotterdam duty-unpaid and duty-paid premiums each fell $5 this week to $90-100 per tonne and $145-155 per tonne respectively.
"Europe is softly ticking lower - demand is OK but there is a lack of excitement. It's interesting that the [LME] spreads are the same on both sides of the Atlantic but premiums are going up in the US and down in Europe," a European trader said.
"I think that speaks to the difference in fundamentals [between the two regions]," he added.
A Rotterdam DUP premium of $90 and a US Midwest premium of $200 would be enough of a differential to justify diverting metal to America, he added.
Russia and the Middle East are the two key global swing suppliers. If premiums are too low in Europe, smelters in those countries will look to sell to Japan or the US.
But for now the US is a much more attractive market. Japanese consumers are well supplied and port stocks still remain fairly high. Also, they typically book less tonnage in the first quarter because they prefer winding down stocks ahead of the end of their financial year on March 31.
As well, the yen slumped after the Bank of Japan moved rates to negative territory earlier this week. This makes importing metal more expensive for companies there.
RISKS REMAIN
Some US market participants, however, are concerned that too much metal might be headed to the country while its manufacturing sector is showing some signs of weakness.
This would be a repeat of what happened from the first quarter of last year. Imports of aluminium ingot, scrap and mill products into the US and Canada peaked at 290,000 tonnes in March 2015, according to Aluminum Association data. On an annualised basis, that would have equated to massive 3.4 million tonnes.
The market quickly become flooded with competitively priced metal - this was the key factor in the rapid fall in US premiums, which dropped from 24 cents to 7.0 cents over a 17-week period.
"The good news is that premiums won't fall nearly as far this time. It's certainly possible that [the US Midwest premium] could overcorrect to 7.0 cents if there is another wave [of imports]. But the downside is somewhat limited," a US-based trader said.
Meanwhile, the demand side is holding up pretty well early in 2016 - most US consumers have taken the maximum on their first-quarter contracts, FastMarkets understands.
"There seems to be this persistent theme that demand is slowing [given recently soft US manufacturing data]. But my order book is full for the next three months," an aluminium billet producer said.
"From our perspective, physical demand has been right where it should be. We would characterise demand as good and supply as tight," he added.
Nevertheless, some ominous reports have been released recently. For example, the ISM manufacturing index was 48.2 in January - any reading below 50 signals contraction. The index has remained below 50 since September.
US factory exports and employment also fell in January although new orders and production grew for the first time since October.
(Editing by Mark Shaw)