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What Does the Latest Trend in Aluminum Premiums Mean for Alcoa?

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Aluminum premiums

Previously, we explored the recent trend in aluminum prices. Now, we’ll see how aluminum premiums are playing out. For aluminum producers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums.

The aluminum premium is a surcharge that consumers must pay on top of the prevailing prices in order to take delivery of the metal from the warehouses. Aluminum premiums are key indicator investors in primary producers including Alcoa (AA), Rio Tinto (RIO), and South32 Limited (SOUHY) should track.

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US Midwest aluminum premiums

The above graph shows the movement in spot US (IVV) Midwest aluminum premiums so far this year, as reported by Metal Bulletin. Aluminum premiums more than doubled in 2014, helping Alcoa post record profits last year. However, aluminum premiums have been in a free fall since then and have corrected by more than two-thirds since the beginning of the year.

US Midwest aluminum premiums were fairly stable in July and August, inching up a bit in early July. However, aluminum premiums have fallen again in September. As of September 23, they were quoted at $0.07 per pound, falling more than 12% in September.

Europe

Aluminum premiums in Europe have also been weak. The duty unpaid premium in Rotterdam, according to Metal Bulletin, was quoted at $64 per metric ton on September 24. Europe’s aluminum premiums have fallen by more than $26 per metric ton in September. That these are all-time lows for aluminum premiums in Europe.

Falling aluminum premiums are expected to negatively impact the earnings of primary aluminum producers such as Alcoa and Century Aluminum (CENX). Currently, Alcoa forms 4.6% of the SPDR S&P Metals and Mining ETF (XME).

Meanwhile, how are aluminum inventories shaping up on the London Metal Exchange? We’ll explore this in the next part of this series.

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