Winter Park, Florida 17/08/2016 - Aluminium suppliers are already pushing United States consumers to sign annual 2017 contracts by arguing that more metal will have to come from further away next year.
But thus far, the consumers aren't taking the bait. They see the sharp downward trend in spot regional physicals premiums as evidence that there will plenty of aluminium available in the early part of next year.
What is undisputed is that there has been a major change in how the United States market is supplied. Due to the strong dollar, low aluminium prices, as well as high power and labour costs, US domestic primary aluminium smelters are now mostly uncompetitive. In 2001, there were 23 smelters in the US; currently, there are only five.
The average cash cost to smelt primary aluminium in the US is now around $1,723 per tonne, compared with a global average of $1,348, while the cash cost for Russian producers is just $1,212, according to consultancy UNO International Trade Strategy.
The US will produce less than one million tonnes of aluminium this year, but will consume over six million tonnes, equating to a natural deficit of around five million tonnes. This means that America is now dependant on imported supply from Russia, Canada and the Middle East.
Aluminium imports of ingot, scrap and mill products into the US and Canada (excluding cross-border trade) climbed to an all-time record of 816 million pounds or 370,000 tonnes in June, up 62.0 percent year-on-year, the Aluminum Association reported.
Through the first half of 2016, total imports were up 18.8 percent to 3.952 billion pounds (1.8 million tonnes), the trade group added.
THE PRODUCER'S CASE
Offshore suppliers have already jump-started annual negotiations in an effort to put down roots in this transitioning market.
"Because there are so many imports, you need two or three months lead time if you want to guarantee supply, so you need to have a contract in place by October," a seller in the US told FastMarkets.
The only two primary smelting companies left in the US are Alcoa, which rarely sells on the spot market, and Century Aluminum, which operates in Sebree and Hawesville, in Kentucky, and Mt Holly, in South Carolina. Both Hawesville and Mt Holly are currently only running at 50 percent of capacity due to expensive power contracts.
"[Century produces the] marginal units [in the US]. When you talk to consumers that rely on [that metal], they're nervous that this capacity could go away," the seller said.
CONSUMERS PUSH BACK
Despite the suppliers' pleas, consumers are pushing back at this early stage. They note that US Midwest aluminium premium this week fell to a new five-year low of 6.25-6.75 cents per pound, down from 6.9-7.25 as soft summer demand has not been able to absorb a record flow of competitively priced imports.
"Everyone and his mother has been shipping metal to the US - that's why premiums have come down," a trader in Europe said.
Fabricators only tend to book early when they perceive that prices are going to rise and right now spot premiums are in a steep free fall, a US-based trader said.
“Customers have a strong incentives to wait it out. If anything gets accelerated, it will be on the supplier side," a US-based trader said. "Negotiations are gonna drag longer than last year and longer than maybe the last few years."
P1020 ingots for 2016 were booked mainly on floating basis but some deals were locked in at 10-12 cents per pound on a delivered basis to the Midwest region. With spot prices at just above 6 cents, consumer will most certainly balk at offers around last year's contractual levels.
The US aluminium industry will gather next month at Aluminum Association's Spring Meeting and American Extruders Council's Management Conference to be held in Washington DC from September 24-28.
"We think that will be a pretty important week," one trader said. "We will see just how far the importers will cut prices in order to gain market share. If the consumers walk away, then things will drag out into October or November."
Editing by Archie Hunter