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How Rising Physical Premiums Could Impact Aluminum Producers

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Physical premiums

For aluminum producers, the all-in aluminum price consists of the price of aluminum plus physical aluminum premiums. Physical premiums are regional in nature—unlike aluminum prices, which are more global in nature.

Physical premiums refer to a surcharge that consumers must pay in addition to aluminum prices in order to take immediate delivery of aluminum from warehouses.

US aluminum premiums were weak in July. However, we’ve seen an increase in premiums since then. Premiums in Europe have also risen slightly.

Higher aluminum premiums are positive for aluminum producers like Alcoa (AA), Century Aluminum (CENX), and Norsk Hydro (NHY), as they lead to higher average realized aluminum prices (SOUHY) (XLB). Higher physical premiums could provide some comfort to aluminum producers now that aluminum has come off its 2017 highs.

Key drivers

Physical aluminum premiums tend to reflect end-market dynamics, compared with aluminum prices, which is impacted by speculative activity in the short term. LME (London Metals Exchange) aluminum stocks have fallen steeply this year, as can be seen be seen in the graph above.

Currently, aluminum inventory in official LME warehouses is at ~1 million metric tons. Inventory levels have fallen by almost 1 million metric tons since the beginning of the year. However, SHFE (Shanghai Futures Exchange) aluminum stocks have risen to an all-time high on the back of higher Chinese aluminum production in the first half of the year.

Nonetheless, global aluminum stocks have fallen overall. Most aluminum producers expect global aluminum markets to remain a state of supply balance this year.

In the next part, we’ll see how alumina prices are playing out this year.

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