uploads/2016/02/us-premiums1.png

Have US Midwest Aluminum Premiums Peaked?

By

Updated

US Midwest aluminum premiums

Previously in this series, we checked out the recent movement in aluminum prices. Now let’s look at the recent trend in US Midwest aluminum premiums.

It’s important to note, first, 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. Alcoa (AA) sees physical aluminum premiums as a better reflection of the aluminum industry’s dynamics than aluminum prices.

Article continues below advertisement

Premiums steady

The above graph shows the movement in spot US Midwest aluminum premiums over the last year, as reported by Metal Bulletin. As of February 10, they were quoted at $0.091 per pound. US Midwest aluminum premiums have been holding steady in the ballpark of $0.09 per pound for the last couple of months.

You can also consider the SPDR S&P Global Natural Resources ETF (GNR) to get a diversified exposure to international natural resources companies. Together, BHP Billiton (BHP) and Rio Tinto (RIO) form 6.1% of GNR’s portfolio.

What impacts premiums?

Physical delivery premiums are more regional in nature than the LME (London Metals Exchange) aluminum prices. Looking at the dynamics of US aluminum industry, the demand-supply mismatch has only increased in the recent times. While the US aluminum demand has been increasing, we’ve seen several capacity curtailments last year. Though some of the curtailments by Alcoa and Century Aluminum (CENX) have been partially rolled back, they have still increased the reliance of US aluminum consumers on imports and LME warehouses. This demand-supply mismatch should support US aluminum premiums.

That said, there are several moving parts that determine delivery premiums. In the next part, we’ll look at some of the factors that could hinder any upward movement in US aluminum premiums.

Advertisement

More From Market Realist