Curious Case: Aluminum Premiums in the Midwestern US



Aluminum premiums

In the last part of this series, we discussed that aluminum prices declined 12% in May. Now, we’ll take a look at the recent movement in the aluminum prices in the Midwestern US. Please note that an “aluminum premium” is a surcharge that aluminum consumers must pay on top of the prevailing prices in order to take the delivery of metal from the warehouses. Aluminum premiums more than doubled in 2014.

Higher aluminum premiums helped Alcoa (AA) post record profits last year. Currently, it forms 2.8% of the Materials Select Sector SPDR ETF (XLB) and 0.86% of the iShares North American Natural Resources ETF (IGE).

Other aluminum producers like Rio Tinto (RIO) and Noranda Aluminum (NOR) also benefited from higher premiums.

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Premiums plummet

The above chart shows the movement in the Midwest’s aluminum premiums. In May, premiums dropped more than 30%. Since the start of 2015, the Midwest’s aluminum premiums have decreased almost 60%. Now, aluminum premiums have dropped below $0.10 per ounce.

The tide seems to have turned upside down for aluminum premiums. The current correction in aluminum premiums has been even more spectacular than the uptrend last year.

Why are premiums falling?

There seems to be a chain reaction in the way aluminum premiums are falling. Higher premiums benefited traders entering into aluminum financing deals. With premiums’ steep fall, traders might be rushing to salvage their investment.

There appears to be more downside to the US aluminum premiums before they stabilize. Premiums haven’t just corrected in the US. Europe is ahead of the curve as far as the premium correction saga is concerned. In the next part of this series, we’ll analyze how aluminum premiums are shaping up in Europe.


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