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Aluminum Prices Reflect Weakness in Physical Markets

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All-in aluminum price

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 in order to take immediate delivery of the metal from the warehouses. Alcoa (AA) sees physical aluminum premiums as a better reflection of the aluminum industry’s dynamics compared to aluminum prices.

Aluminum premiums reached record highs in early 2015. The helped primary aluminum producers including Rio Tinto (RIO), Century Aluminum (CENX), and Nork Hydro (NHYDY) post higher earnings.

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Aluminum prices

In our previous series, we noted that there’s a disconnect between aluminum prices and physical aluminum premiums. While aluminum prices rose, aluminum premiums started to fall in the US (VTI) and Europe. You can see this in the above graph. It’s important to note that premiums are decided between aluminum buyers and sellers. This is unlike aluminum prices that are decided on the exchange. The exchange is generally dominated by financial market participants.

While aluminum prices also reflect traders’ sentiments, premiums generally display the mood in physical aluminum prices. Being an industrial metal, aluminum’s medium to longer-term price movement should be guided more by the physical markets instead of financial market sentiments.

Balancing act

Weakness in physical aluminum markets is finally being reflected in aluminum prices. The London Metal Exchange’s three-month aluminum contract is getting dangerously close to the key support level of $1,500 per metric ton. Spot aluminum prices already breached the $1,500 price level and closed at $1,489 per metric ton on March 16. Aluminum prices lost almost $100 per metric ton since March 7.

In the next part, we’ll explore what lower aluminum prices mean for Alcoa and other aluminum producers.

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