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Physical Premiums Show a Different Side of Global Aluminum Markets

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Physical 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 such as Century Aluminum (CENX), Norsk Hydro (NHYDY), and Rio Tinto (RIO) should track.

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Premiums have fallen

The above graph shows the movement in spot US Midwest aluminum premiums so far this year, as reported by the Metal Bulletin. US Midwest aluminum premiums are currently quoted at $0.06 per pound. Premiums have fallen slightly in August and are now down more than 31% year-to-date (or YTD).

The picture looks no better in Europe, where physical premiums are approaching their all-time lows. Although aluminum prices have risen on a YTD basis, premiums have actually fallen.

Disconnect

There seems to be a disconnect between aluminum prices (DBB) that are decided by trading on exchanges and physical premiums that are settled between actual buyers and sellers. Some producers such as Alcoa (AA) see physical premiums as a better reflection of aluminum markets compared to LME (London Metal Exchange) aluminum prices.

The weakness in premiums could be attributed to aluminum inventories with non-LME warehouses. Over the last few years, official LME inventory has been falling despite the markets being in a surplus.

A lot of aluminum is believed to have moved to non-LME locations to escape strict LME warehousing rules. Some of the aluminum from non-LME-registered warehouses could be entering physical markets, putting pressure on premiums. Nonetheless, the projected deficit in aluminum markets in 2016 would help ease the glut of the metal created over the last decade.

You can read How Do Aluminum Producers Look Going into 3Q16? to learn what different primary producers are forecasting for global aluminum markets.

You can also visit our Aluminum page for more updates on this industry.

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