European physical aluminium premiums up

Strong demand for aluminium in Europe pushed spot premiums higher this week and they were seen firm through the first half of 2007 before coming under pressure, traders said. "In Europe the market for aluminium is very tight, but the opposite is true for the US and Asia," a physical trader said.
Traders said premiums for aluminium were at $140/150 a tonne above the LME cash price for duty paid material in Rotterdam, versus $125/135 in the beginning of September.
"We are seeing...$150 for significant tonnages," a second merchant said. Demand for aluminium had been particularly strong this year, meanwhile the supply situation remained stable, he said. "I think this will remain the case for the next 3-6 months, so the spot premium could go higher - $200 by year-end is not impossible," he said.
In the US the slowdown in demand could be explained by a sluggish housing market and destocking ahead of the New Year. In Europe the market was facing a shortage of aluminium, traders said, but in much of Asia business was sluggish. The first trader said rising Chinese smelter production would force premiums down in the second half of 2007.
"What has been produced in China, so far, has been consumed in China, but once the market is saturated - China will have to start to export aluminium," he said. "The start up of idle capacity will force premiums lower." Michael Widmer, analyst at Calyon, saw the aluminium market in a small deficit in 2006, but moving into a surplus of 60,000 tonnes in 2007.
"Demand coming from Europe... has looked really strong during the last few months, but moving into 2007, the general picture on the aluminium market doesn't look that good," the analyst said. The price of alumina, an intermediate product that is smelted into primary metal, has more than halved since March to around $230-250 a tonne, with further declines seen likely due to looming supply surpluses, mainly on surging Chinese output.
"We are around $230, and as a percentage of the LME aluminium price it is only around 8 percent - extremely low," an alumina trader said. The fall in spot alumina and increased availability have spurred the restart of idled smelting capacity across China, analysts said.
Australian bank Macquarie said the fall in alumina prices from the second quarter had lifted Chinese aluminium smelting to an annual rate of 9.92 million tonnes in September from 9.23 million tonnes in July.
Alumina makes up 30-40 percent of aluminium smelting costs, while power - a major factor behind the earlier idling of capacity in China and elsewhere - accounts for a similar proportion.