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Will Weakness in Europe Weigh Heavily on US Aluminum Premiums?

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European premiums

Aluminum premiums vary across regions, depending on the demand-supply dynamics. So delivery premiums in the United States (VOO) are different from in Europe (VGK) and Japan. Historically, US Midwest aluminum premiums have been higher than those in other regions. Nonetheless, changes in delivery premiums in one region tend to impact premiums elsewhere as well.

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Premiums weaken in Europe

The graph above shows the US Midwest aluminum premium plotted against the average duty-unpaid premium in Rotterdam. As you can see, they have been generally moving in tandem with each other. At the end of 2014, delivery premiums started to weaken in Europe. However, US Midwest aluminum premiums were still on an upward momentum until February 2015. Thereafter, we saw a steep decline in US aluminum premiums as well.

Impact on US premiums

Looking at the falling aluminum premiums in Europe, US producers’ ability to quote higher premiums will likely be limited. So despite favorable demand-supply metrics, US aluminum premiums might not rise from these levels. Moreover, the global turmoil and weakness in other industrial metals will act against a further increase in US Midwest aluminum premiums.

Another key factor that could keep US aluminum premiums under check in 2016 is the threat of imports. Higher US premiums might attract more imports in the country putting pressure on the delivery premiums. More Chinese aluminum exports have created havoc in global aluminum markets. It’s thus crucial for investors in companies like Alcoa (AA), Rio Tinto (RIO), and Century Aluminum (CENX) to keep track of Chinese aluminum exports.

Now let’s look at how much aluminum China exported in January.

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