Winter Park, Florida 01/09/2016 - United States aluminium premiums have crumbled below the psychologically and technically important six cents per pound barrier due to record high imports, softening demand and a lingering inability to easily finance stocks because of sloppy London Metal Exchange spreads.
The US Midwest premium this week fell to a seven-year low of 5.75-6.25 cents per pound and there have been antidotal reports of parcels offered for as low as five cents in liquidation deals.
IMPORTS NOT SLOWING
The primary problem is the unprecedented flow of primary aluminium imports, which in the first six months of 2016 increased by 20 percent to 2.1 million tonnes. The biggest exporters to the US were Canada at 1.13 million tonnes (up 3 percent), Russia at 366,000 tonnes (up 105 percent), the United Arab Emirates (UAE) at 286,000 tonnes (up 97 percent), according to the US Geological Survey.
June meanwhile set an all-time record at 401,000 tonnes, up 33 percent year-on-year, with imports from Russian and the UAE spiking by 353 percent and 233 percent respectively, according to the USGS.
“[The imports] just haven’t stopped coming and they are actually increasing,” a trade source said. “Premiums are falling but it’s still seen as a better demand market than Europe or Japan. You’re taking a loss on freight [at these premiums] but suppliers see the US as the one place where they can unload units.”
BUT DEMAND IS WANING
However, there has been a noticeable slowdown in demand that goes beyond normal seasonal factors.
Extruded aluminium product shipments by US and Canadian producers totalled just 409.6 million pounds or 185,793 tonnes in July, down seven percent year-on-year, according to the Aluminum Association.
Compared to the previous month, shipments decreased 9.1 percent from the June 2016 revised total of 450.7 million pounds or 204,000 tonnes, the trade group said.
Likewise, net shipments of aluminium sheet and plate were just 308,000 tonnes in July, off 4.6 percent year-on-year. Compared to the previous month, shipments decreased 6.8 percent.
The Aluminum Association's index of net new orders of aluminium mill products for July decreased 9.9 percent from the previous month. Orders for flat roll products were down 8.3 percent while orders for extruded products declined 13.6 percent and orders for redraw rod were off 19.4 percent. Compared to July 2015, orders were down 2.5 percent.
In the bigger picture, several participants said that the automotive sector is showing signs of levelling out. In August, Ford and General Motors reported month-over-month declines and failed to meet analyst expectations.
Ford posted an 8.8 percent sales drop, while GM declined 5.2 percent year-over-year, which was below the Edmunds.com forecast of -9.8 percent and -5.7 percent respectively.
INVENTORIES LEAKING INTO THE MARKET
Another prominent market feature is the slow but steady leaking of warehouse stocks into the consumer market. Over the past year, LME spreads have been inconsistent and not particularly conducive to the long-term financing of metals.
Some large banks and traders, meanwhile, continue to hold long positions and several are looking to get out of the metals financing game.
“Cash and carry economics continue to deteriorate. The reasons behind the change in cash and carry economics are: increasingly tighter LME spreads, backwardations at different points of the front end of the LME forward curve, plummeting spot market premiums, and an upward trend in interest rates,” said Harbor Aluminum, which estimates that 1.3 million tonnes of aluminium is currently held off-warrant in the US.
"Stored surplus metal of prior years is increasingly competing with freshly produced metal, and even more now that primary aluminum production in Asia continues to expand. As a result, merchants and banks are net sellers and more so as LME spreads tighten further and premiums reach new lows on effects of LME warehousing reform and lower freight rates,” Harbor added.
It’s also possible that some metal holders will move off-warrant metal back into LME sheds, where incentives are currently between $40-$50 per tonne. That’s what happened on August 18 when 24,500 tonnes moved into ISTIM warehouses in Detroit.
“ITSIM in Detroit is actively the probing market, and I hear that more material will be arriving here,” a warehouse source said at the time.
(Additional reporting by Dalton Barker)