Can Physical Premiums Gain Strength Like Aluminum Prices?



Physical premiums

Previously in this series, we’ve looked at the recent trend in aluminum prices. However, for aluminum producers, the all-in aluminum price consists of the price of aluminum plus regional aluminum premiums. These premiums are a surcharge that consumers must pay in addition to aluminum prices in order to take immediate delivery of aluminum from the warehouses.

Along with aluminum prices, physical premiums also impact aluminum producers’ average realized prices. As a result, they form a key indicator for investors in primary producers (XLB) such as Norsk Hydro (NHYDY), Century Aluminum (CENX), and Rio Tinto (RIO).

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Premiums have been weak

While aluminum prices have been strong this year, premiums have fallen. Despite the recent uptick in US aluminum premiums, premiums are slightly lower compared to the scenario the beginning of 2017.

However, physical premiums in Europe are slightly higher compared to the levels in early 2017. While aluminum prices are global and are decided by trading mechanisms, physical premiums are negotiated between the end buyers and sellers.


The divergence between aluminum prices and physical premiums could be attributed to the dynamics of the physical market. Although financial markets are optimistic over China’s supply-side reforms, aluminum markets are still expected to be in a surplus this year, according to Alcoa (AA). Surplus equals production in excess of demand.

Meanwhile, alumina prices have shown some stability over the last couple of months. We’ll discuss its implications in the final article in this series.


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