Backwardation Pressuring Midwest Premiums November 06, 2006

Backwardation has been pressuring the aluminum premium lately, traders and
analysts reported.

The U.S. Midwest prompt aluminum premium over London Metal Exchange cash
prices has been in a range of 5 to 5.50 cents over the last week, they
reported. This is down from a range of 5.25 to 6 cents that traders had listed
the prior week.

"The premiums continue to fall," said Jim Southwood, president of Commodity
Metals Management. "That's mainly due to the backwardation on the LME, as well
as a lack of orders in the United States."

Aluminum shipments fell sharply in September, and October data is also
expected to be weak, he said.

"The premium is based on quotes, orders and business. And if there is no
business, it's going to fall to find a buyer," explained Southwood. "It's been
coming down a little bit."

A trader also cited backwardation as a key factor pressuring the premium,
along with selling ahead of year-end.

"Premiums, on a short-term basis, are under a lot of pressure," he explained.
He reported that the premium has been around 5.25 cents lately, but with a
range of 5 to 5.5 cents. He blames this largely on end-of-year selling by
producers and consumers alike.

"Come the end of the year, the accountants say 'we'd like metal off of the
books,'" he explained. "So if you have inventory, they want you to sell it. So
both producers and consumers are coming into the market trying to unload
inventories right now. Normally, they'll come back in January and buy back, but
they need to get it off of their books for this year."

Backwardation occurs when forward prices are lower than the prompt or spot
prices. Southwood explained that backwardation on the London Metal Exchange
hurts the hedge-able aluminum premium since it means market participants who
are holding inventory, awaiting a buyer, would lose money if they tried to
refinance by selling forward.

They can refinance this way during times of contango.

"If the future price is higher, they just sell it forward, and use that to
offset the cost of holding inventory," he explained. "But when you're in
backwardation, you can't do that. Then selling forward costs you money."

He later added: "The backwardation has been between the month of December '06
and all of the forward months. Now, we're sitting on the first day of November
and we still have a contango from the first of November to the middle of
December. But every day we go, that number shrinks."

Thus, this ability to finance inventory is diminishing, he continued.

"The traders know this, so they have to lower their prices to get out from
underneath it," he said. "They would rather sell at a 5-cent premium than
re-hedge the material and take a loss."

Southwood's company calculates a finally settled Midwest premium that is
meant to act as a leading indicator of change and to be helpful to clients by
giving direction at a time when no trades are actually occurring. A couple of
weeks ago, this indicator had suggested the premium would come down to the
5-cent area or lower.

Traders are reporting that the premium currently quoted is down to around 5
cents, Southwood related. But Commodity Metals Management's calculated premium
is now down to around 4.5 cents, he said.

LME cash aluminum was officially quoted at $2,786 to $2,787 per metric ton
Wednesday, or about $1.2635 to $1.2639 per pound.

Inventories of aluminum stored in LME warehouses rose 2,150 metric tons to
681,050 from Tuesday to Wednesday. The total is down from 685,550 metric tons
one week ago.
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