US Aluminum Market Premiums set to Increase in 2010

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Despite semis demand being down some 30% from this time last year, the North American aluminum market is comparatively tight for material, particularly for ingot, scrap and flat rolled semis. On the primary side, smelters with higher cost structures have been idled and the low dollar has encouraged the flow of metal from coastal smelters overseas to take advantage of higher premiums in Europe and particularly in Asia. Premiums for primary metal in Japan are the highest since 2006 and have doubled since the early summer of this year. Although Russia’s Rusal has been shipping metal to Glencore to be tied up in long-term financing deals, there has been less metal flowing to the US and less available for spot sale in Europe. Consequently, premiums have increased significantly since the summer helping to support the LME price.

Meanwhile the semi’s market, which crashed in both demand and price at the end of last year forced the idling of rolling facilities in a desperate attempt to match supply to reduced demand. Demand has since gradually picked up but producers have been slow to bring back idled capacity until prices begin to move up. As a result, we are currently in that stage of a recovery where demand is very slowly increasing but supply is not, creating the potential for a squeeze on prices in the New Year. Mills are sold out for this year so pricing now is for the first quarter of 2010 and for the time being mills appear largely to be passing through ingot increases. But if demand continues to uptick gradually each month, there will come a time soon when they will look to increase premiums again following October’s increase. So far the distributors, although carrying a little more stock than during the summer have not entered into a re-stocking program of any note, preferring like the producers to wait and see how demand develops.

Residential and commercial construction are flat, automotive is up a little and trucks should begin to show some growth early next year. The risks of a double dip appear to be receding. The recent drop in unemployment levels, though slight is an encouraging sign. If buyers are working on a value add premium over P1020 or Mid West Ingot then we would suggest fixing second quarter premiums at the same level as the first may not be a bad idea. The next few weeks will be very quiet now. Many firms appear to be going into the holiday shut-down early, not actually closing but postponing decisions and activity to next year. Come January we will have a clearer picture of how the first half of 2010 is likely to unfold and our expectation is flat rolled producers are going to go for premium increases before they bring anymore capacity back on line.

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–Stuart Burns

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