The Sebree Smelter, Aluminum Premiums, and Production Cuts



Sebree smelter

As discussed in the previous part, Century Aluminum (CENX) announced the continued operations of its Sebree smelter in Kentucky. Interestingly, Century Aluminum’s president and CEO, Michael Bless, noted during the company’s 3Q15 earnings conference call, “We will only run each of our operations in a manner that yields nominally a breakeven result even in the current depressed environment.” He added, “We’ve got no interest in impairing our liquidity to fund losses.”

Aluminum prices have mostly traded below the crucial $1500 per metric ton per level for more than a month now. Furthermore, aluminum prices didn’t change much since Century announced the partial curtailment of its Sebree smelter toward the end of October.

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Aluminum premiums

It’s important to note that 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 to take immediate delivery of the metal from warehouses. Aluminum producers, including Rio Tinto (RIO) and Norsk Hydro (NHYDY), benefit from higher aluminum premiums.

You can consider the Materials Select Sector SPDR ETF (XLB) to get a diversified exposure to the materials sector. Currently, Alcoa forms 2.4% of XLB’s portfolio.

Production cutbacks

The rise in US Midwest aluminum premiums could be one possible reason for why Century Aluminum is keeping the Sebree smelter running. Premiums have risen by ~$35 per metric ton in the last month. The proposed production cutbacks by Alcoa (AA) and Century Aluminum were some of the factors that led to higher premiums.

Meanwhile, there could be another commercial reason behind this move as we’ll explore in the next part of the series.


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