Duty-unpaid aluminium premiums in Europe took another major hit on Tuesday, as backwardations on the London Metal Exchange continue to bite and oversupply buffets the market.

Metal Bulletin’s quotation dropped $30 on both ends to $150-200 per tonne, putting the weighted average at $179.97 per tonne.

“It’s coming down very quickly. My estimate is that we’re going to see $200 on the duty-paid side towards the end of May,” a producer said.

“It seems to be getting much quicker now. I think probably what makes a big difference is that we’re really seeing a slide in the US Midwest premium.”

The Midwest premium has seen a similarly precipitous fall, affected by similar factors as its European counterpart, dropping from about 24 cents per lb in January to about 18 cents as of April 16.

“It was relatively resilient for a few months – much more so than in Europe – but I think [the rapid fall] has become the dynamic in the States as well,” he said.

“It’s probably going to add an extra dimension in Europe. On the demand side, there’s not really an issue – it’s not that great or anything to get excited about, but this is certainly a supply problem. There’s too much metal around.”

For the same reasons, duty-paid premiums are also expected to see a marked decline in the coming days, sources have said.

A trader explained, meanwhile, that it is still possible to make a profit in an environment where prices and premiums are challenging.

The principle is that while prices are higher on a cash basis, it is possible to offer a lower premium and still make money.

“If I do something [on a duty-paid spot basis] at $250, it's probably worth more like $260-265 to me [on a three-month basis],” the trader said.

“If I can price that in early May, I can lend out of the long, and then I’ll make the extra money on that. People will discount the premiums by assessing how much money they will be able to make out of the backwardation. You try to do it better than a one-to-one ratio.”

It may be possible to cut the cash premium by as much as $7 in the knowledge that it will be possible to make $10 later, according to the trader.

“For example, if there’s, say, a cash-to-threes or a cash-to-next-week back of $10, I can sell now and I may be able to discount it,” he added.

“I can sell it today, pricing today and, in two days, I will have a long because I’m selling physical and buying futures. That’s a future I can lend into the backwardation and I might be willing to discount $5, $6, $7 because I know I can make $10. It depends on how good you are and also how lucky you are.”

Metal Bulletin will publish its latest European duty-paid premium quotations on Wednesday April 22.

Claire Hack 
Twitter: @clairehack_mb