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What’s Keeping Physical Aluminum Premiums Weak This Year?

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Jun. 6 2016, Updated 12:07 p.m. ET

Physical aluminum premiums

For aluminum producers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums. An aluminum premium is a surcharge that consumers must pay on top of prevailing prices in order to take immediate delivery of the metal from warehouses.

Aluminum premiums are a key indicator that investors in primary producers, including Aluminum Corporation of China (ACH), Norsk Hydro (NHYDY), and Rio Tinto (RIO), should track.

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Premiums have been weak

The above graph shows the movement in spot US Midwest aluminum premiums so far this year, as reported by Metal Bulletin. US Midwest aluminum premiums were stable at $0.08 per pound in May. However, on a YTD (year-to-date) basis, aluminum premiums have fallen almost 15%.

Premiums have been weak in Europe (HEDJ) as well. Although the average duty-unpaid premium in Rotterdam was almost flat in May, it has fallen 33% on a YTD basis.

Weakness in physical markets

Note that some producers such as Alcoa (AA) see physical premiums as a better reflection of aluminum markets compared to LME (London Metal Exchange) aluminum prices. Although aluminum prices have risen on a YTD basis, premiums have actually fallen. Unlike aluminum prices that are based on daily trading on the LME, aluminum premiums don’t have any daily trading mechanism.

According to Platts, a metals information provider, “Premium or discount is determined based on physical spot deals, bids and offers reported through a daily survey of spot buyers and sellers, using a representative sample of producers, traders and different types of end users.”

The weakness in physical aluminum markets seems to be weighing heavily on premiums. We’ll get a better idea when we look at aluminum’s demand-supply dynamics. But before that, let’s see how alumina prices shaped up in May.

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