Winter Park, Florida 10/02/2016 - An unusually wide spread has opened between P1020 aluminium premiums in the United States and Europe - one that easily covers the added costs to divert metal across the Atlantic Ocean.
In the US, the Midwest delivered aluminium premium has held up remarkably well at 9.0-9.25 cents per pound over the LME price or $198 per tonne.
There are two main reasons for this strength. First, demand is good - apparent US consumption in the US in 2015 was 5.4 million tonnes in 2015, an increase of 6.3 percent year-on-year, according to US Geological Survey (USGS).
And on the supply-side, domestic primary aluminium production fell to just 1.6 million tonnes in 2015 and is expected to drop well below 1 million tonnes this year following smelter closures by Alcoa, Century and Noranda.
This growth in demand plus hefty supply cuts will lead to a regional deficit this year of around 4 million tonnes in the US. Simply put, more metal will have to come from further away, which justifies higher US premiums.
It's a different story in Europe, where demand is sturdy as opposed to extraordinary, and aluminium inventories are large. Rotterdam duty-unpaid premiums eased this week to $85-95 per tonne, down nearly 20 percent from December.
Meanwhile, narrow spreads on the London Metal Exchange have encouraged stockholders to discount metal rather than carry it through the February backwardation.
LME cash/threes, cash-Feb, cash-March and Feb-March are all in backwardation, which renderers near term stock financing unprofitable. Therefore, the best option for many is to either sell to European consumers at low premiums or to put metal on a boat and send it the Port of Baltimore and the US Midwest.
FIVE CENT SPREAD A GAMECHANGER
The arbitrage between DUP Rotterdam and the Midwest delivered premium this week blew out to $108 per tonne or 4.9 cents per pound, which is creating some interesting opportunities for nimble producers and traders.
"I'm stunned by the widening spread between Europe and the US. It's 4 cents max to bring metal into the Midwest - so a lot of metal has to be en-route or is being loaded as we speak," a European trader said.
But most agree that this pricing dynamic isn't sustainable because either the US will be flooded with imports or European consumers will have to accept slightly higher prices.
"Europe is in much worse shape economically and that's being expressed in the form of low premiums there. Metal is being diverted to the US so the arb between the two regions has to come in. I see the [US] slipping back to 8.5 cents but not much below that. Fundamentals here are just too strong," a US-based trader told FastMarkets.
However, more pessimistic European traders tend to think that the Midwest premium might drop to 8 cents or below in the next couple week.
"US will come down - 9 cents is not what it costs to ship the metal there, it should be closer to 8 cents or even less," one European merchant said.
(Editing by Archie Hunter)