Will Aluminum Midwest Premiums Keep Rising in 2012-2013?

As my colleague Stuart wrote just a few days ago, “The Midwest [aluminum] price has always traded at a premium over the LME, reflecting as it does the cost of delivery to the US Midwest from smelters based closer to the coast or warehouses in major metropolises, but $200 is way over the cost of delivery and reflects a market in crisis.

“Consumers are going to have to live with a high Midwest ingot premium over the LME for the time being,” he concluded.

While Stuart predicts that premium rises above $200 per ton are as unlikely as significant falls, Jorge Vazquez of Harbor Aluminum sees nowhere but up for the Midwest ingot and billet premiums.

In fact, in a presentation during the Harbor Aluminum Outlook conference Tuesday, Vazquez pointed out that aluminum premiums across the globe are at record highs except for Brazil, for both ingot and billet — and that he expects premiums to keep moving up in 2013 and beyond.

So what’s behind these premium increases? Of course, a number of factors play a role, according to Vazquez. Simply put, there is less physical supply out there to satiate North American demand (which has been growing at a rate of 5 percent, while production from December 2011 to April 2012 has been down). Also, disruptions across the US and Canada specifically in the billet markets, not to mention diesel prices and other freight costs (“It costs money to move metal,” Vazquez quipped), have contributed to the systemic rise.

On top of all that, you have 71 percent of the metal in only four LME warehouses, said Vazquez, much of which is simply not available. “This situation won’t change significantly as financing deals’ profitability remains.”

To the Aluminum Supply Deficit

According to Harbor, North America has an aluminum supply deficit, and has traditionally imported from Latin America — but now Latin America is having production output issues, and US ingot imports from that region dropped 46 percent quarter-on-quarter in Q1 2012. So, North America had to supplement with importing metal from Russia, Tajikistan and Bahrain.

As the deficit in the Americas grows, with output falls and disruptions, Russia has stepped up with ingot exports to the US as the leader. Canada is second in line, with Australia right behind it — although Australia’s exporting volume is dropping. Vazquez advised to look to the UAE (specifically Dubal and EMAL) to export much more in the future.

Only small expansions are set to take place the rest of the year — in Iceland, in the UAE, and ALBA in Bahrain — but hardly any others, according to Harbor. In 2013, however, the Middle East will continue expanding.

Harbor anticipates the North American aluminum physical supply deficit to grow, and with it, Midwest — and global — premiums. The Midwest premium has a seasonal pattern, much as LME prices do — expect higher average premiums in the January-April period, and lower in the summer and December.