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Why April Aluminum Prices in Backwardation Are Negative for Alcoa

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April aluminum prices

Previously, we saw how aluminum spot prices in April are holding steady amid the correction in other commodities. However, April aluminum prices recently moved to backwardation. When forward prices are lower compared to spot markets, it’s called backwardation. On the other hand, when future prices are higher than current spot prices, it’s referred to as contango.

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Backwardation

The above chart shows the difference between three-month aluminum forward and spot aluminum prices. At the start of the year, the three-month aluminum forward contract was trading at $27 per ton, or 1.5% higher over the corresponding spot prices.

The difference narrowed in March, and the trend continued in April. On April 10, spot aluminum prices were trading higher compared to the three-month forward contract.

Financial demand

Aluminum financing deals involve buying near delivery while making a forward sale. The future aluminum prices have to be higher than the prevailing spot prices in order for these deals to be profitable. A backwardation in aluminum prices doesn’t argue well for aluminum financing deals.

Aluminum prices were in backwardation in November. This was followed by a decline in spot aluminum prices. Aluminum prices in backwardation are generally viewed as a negative sign for aluminum producers. Alcoa (AA), Vale S.A. (VALE), and BHP Billiton (BHP) are among the major aluminum producers. Alcoa forms 3.5% of the SPDR S&P Metals and Mining ETF (XME) and 2.65% of the Materials Select Sector SPDR ETF (XLB).

Along with aluminum prices, investors should also closely watch physical aluminum premiums. In the next part, we’ll see how aluminum premiums have moved so far in 2015.

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