Why aluminum prices work in producers’ favor

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Sep. 11 2014, Updated 1:00 p.m. ET

Aluminum pricing mechanism

Aluminum pricing is a complex mechanism. There are various components to the pricing. The primary reference point is the quoted price on the London Metal Exchange (or LME). Along with this price, the aluminum buyers have to pay a premium for receiving metal deliveries. This premium varies between different regions. It depends on a lot of factors. One of the key pricing components is the rent that the warehouses charge for storing the metal. Warehouses complained about hoarding. This was recently overturned by a U.S. court. Let’s understand this is greater detail.

U.S. courts dismissed aluminum buyers’ plea

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Aluminum prices have fallen from their peak. There’s a massive inventory stockpile in the markets. However, there are still long waiting times for the aluminum’s physical delivery. The delivery time at warehouses are at record levels. It’s important to note that many of these warehouses are owned by large banks like Goldman Sachs and JPMorgan Chase. Aluminum buyers filed a lawsuit. The buyers claimed that the warehouses were planning to restrict aluminum supplies in the market.

Recently, the antitrust suit was dismissed by U.S. District Judge Katherine B. Forrest. The judge didn’t find any evidence of an alleged conspiracy by the warehouses. This was a relief for aluminum producers. As a result, their stocks rallied on Wall Street. These premiums increase revenues for aluminum companies like Century Aluminum (CENX), Alcoa (AA), Kaiser Aluminum Corp. (KALU), and Constellium (CSTM). The SPDR S&P Metals and Mining ETF (XME) invest in these metal companies.

Earlier this year an LME rule was overturned by a court in the United Kingdom. The LME rule involved changing the warehousing rules. This ruling was meant to increase the aluminum supply in the market. You can read more about this here. In the next part of the series, we’ll analyze Century Aluminum’s outlook.

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