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Aluminum Premiums Look for Support as All-in Price Crashes

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Aluminum premiums

In the previous part, we saw that aluminum prices seem to be stabilizing at the current level. For aluminum producers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums. Aluminum premium is a surcharge that aluminum consumers must pay on top of the prevailing prices in order to take delivery of metal from the warehouses.

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Aluminum premiums have crashed this year

The above graph shows the movement in spot US Midwest aluminum premiums so far this year. The data are compiled by Metal Bulletin. Aluminum premiums more than doubled in 2014. Higher aluminum premiums helped Alcoa (AA) post record profits last year.

This year, aluminum premiums have crashed more than two-thirds. The decline in aluminum premiums has put pressure on earnings for aluminum producers like Century Aluminum (CENX) and Rio Tinto (RIO).

Are aluminum premiums stabilizing?

Previously, when we looked at Alcoa’s 2015 outlook, we discussed some possible reasons premiums could come down this year. Now, aluminum premiums have corrected steeply and may have found their bottom.

Aluminum premiums in Europe have inched up a bit in the last couple of weeks. Earlier, they hit their all-time low, with the duty unpaid premium in Rotterdam hitting sub-100 levels.

Stability in aluminum premiums is positive for aluminum producers. We could possibly see a little upward move in premiums in the coming months. Aluminum demand continues to be strong, and Alcoa (AA) expects aluminum demand to increase 6.5% this year.

Together, Alcoa and RTI International Metals (RTI) form 8.1% of the SPDR S&P Metals and Mining ETF (XME).

In the next part, we’ll see how aluminum premiums impact aluminum companies in different ways.

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