US aluminum premiums
Alcoa (AA) sees physical aluminum premiums as a better reflection of the aluminum industry’s dynamics than aluminum prices. 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 the immediate delivery of the metal from the warehouses.
Aluminum premiums in 2016
US Midwest aluminum premiums fell hard in 2015 as we can see in the graph above. However, we might not see a further downside in aluminum premiums in 2016. US-based aluminum smelters have announced massive production cutbacks. Alcoa now only has one smelter running in the United States (VTI) while most of Century Aluminum’s (CENX) plants are operating at reduced capacity.
While capacity cuts by US smelters might not have an impact on aluminum prices, cuts could support aluminum premiums. Please note that the aluminum premiums are more regional in nature than aluminum prices, so aluminum premiums in the United States are different from premiums in Europe or Japan. Regional aluminum premiums are based on the demand and supply dynamics in the region.
According to a Reuters report, after the closure of Alcoa’s Warrick smelter, US smelting capacity will fall to a 60-year low. This would lend support to aluminum premiums in 2016. However, the premiums might not rise much as there’s still a lot of aluminum globally, in both LME (London Metals Exchange) and non-LME ecosystems.
Meanwhile, how will Alcoa’s downstream segment that competes with companies like Precision Castparts (PCP), Constellium (CSTM), and Woodward (WWD) perform in 2016? We’ll find out in the next part of the series.