PHYSICALS - US ali prems weak, shaky fundamentals override better LME spreads

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Tom Jennemanntom.jennemann@fastmarkets.comSenior North American Correspondent973-204-3383

Winter Park, Florida 07/09/2016 - The US aluminium industry has endured a rough summer and it will take more than improved London Metal Exchange spreads to lift physical premiums, market participants have told FastMarkets. 

The US Midwest premium remains pinned at a seven-year low of 5.75-6.25 cents per pound and could stay at low levels for the next several months.

There is one major factor in this - the last three months have been a huge disappointment from a demand perspective. Aluminium net shipments (including exports) by domestic US and Canadian facilities totalled an estimated 1.752 billion pounds or 794,701 tonnes during July, down 5.8 percent year-on-year, according to the Aluminum Association.

Shipments of aluminium mill products also decreased 5.8 percent from the previous year to 1.264 billion pounds (573,346) tonnes while shipments of aluminium ingot for castings, exports and destructive uses dropped by a similar 5.8 percent year-over-year to 488 million pounds (221,355 tonnes), the trade group said.

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 dropped 19.4 percent. Compared to July 2015, orders were down 2.5 percent.

On a broader level, the Institute of Supply Management (ISM) manufacturing index contracted in August, falling to 49.4 from 52.6 in July.

"Momentum appears to be ebbing in the manufacturing sector," IHS director of research John Mothersole said. "The global manufacturing PMI registered 50.8 for August, only slightly lower than its 51 reading in July. However, of the major economies covered, more are now showing manufacturing activity contracting (i.e., readings below 50) compared to earlier in the year, including now the United States.”

Cracks are also starting to show in the auto industry. The seasonally adjusted annualised new light vehicle selling rate (SAAR) for August was 16.98 million, according to research firm Autodata, below Edmunds.com SAAR estimates of 17.2 million.

Ford sales dropped 8.8 percent last month while those of GM declined 5.2 percent year-over-year, which was below the Edmunds.com forecast of -9.8 percent and -5.7 percent respectively.


IMPORTS OFF PEAK BUT STILL HIGH

US imports of unwrought aluminium totalled 148,232 tonnes in July. This was down 30.3 percent from the all-time record of 212,797 tonnes in June but it still marks a 61.2-percent increase year-on-year, according to an American Metal Market analysis of International Trade Commission and Commerce Department data.

"Imports may have topped out in June and it's not surprising to see them come down as demand isn't that great and premiums have fallen a good distance. But there's still a lot of metal coming this way and people are still holding large inventories," a US-based trader told FastMarkets.


WIDER CONTANGO OFFERS SOME RELIEF

The contango in the LME c/3s spread has widened in recent days - it last stood at $15.75 - while the important Dec16/Dec17 is now at $45.00, a level that allows cash-and-carry financing of inventories.

Some large banks and traders continue to hold large amounts of aluminium off-warrant and the sloppy LME spreads in August forced some of these players to liquidate stocks, which exited financing deals.

"There is no pressure on the longs to sell at levels which are still close to the lows for the past years," a European trader said. "Whilst seasonal demand may push premiums up over the next couple of months, they remain vulnerable to spread movements combined with [additional] supply ex queues and diverted flows from Asia."

The improved spreads, however, will make it less likely that metal will be moved back on-warrant, which is what happened on August 18 when 24,500 tonnes moved into ISTIM warehouses in Detroit, a US trader said.

"With [warehouse] incentives only around $40 [per tonne], you're better off just financing. If spreads stay around these levels, we won't see metal move back into Detroit but that could all change if they come back in," the trader said.

(Editing by Mark Shaw)



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