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No Break for Alcoa: Aluminum Premiums Are Still Weak

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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 a key indicator that investors in primary producers—including Alcoa (AA), Rio Tinto (RIO), and South32 (SOUHY)—should track.

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US Midwest aluminum premiums

The above graph shows the movement in spot US Midwest aluminum premiums so far this year, as reported by the Metal Bulletin. US Midwest aluminum premiums have been stable at $0.07 per pound in October. However, on a YTD (year-to-date) basis, aluminum premiums have fallen more than 70%

Lower regional aluminum premiums had a negative impact of $138 million on Alcoa’s 3Q15 earnings. Together, Alcoa & Ball Corporation (BLL) form ~4.2% of the Materials Select Sector SPDR ETF (XLB).

Europe

The duty unpaid premium in Rotterdam, according to the Metal Bulletin, was quoted at $78 per metric ton on October 15. Europe’s aluminum premiums have risen by more than $10 per metric ton in October. However, on a YTD basis they’re down more than 80%.

Lower aluminum prices and physical premiums have made aluminum exports not profitable for several Chinese aluminum producers. China’s unwrought aluminum exports have fallen on a YoY (year-over-year) basis for three consecutive months. However, we might see a rise in Chinese aluminum exports again if aluminum prices recover.

The Chinese economy grew at a dismal pace in 3Q15. We’ll discuss this in detail in the next part of the series.

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