How an All-In Aluminum Price Can Become the New Benchmark

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After months of steady decline, aluminum has surged 5 percent during the month of April. As we analyzed in a previous post, prices remain low from a historical perspective and until we see further strength, the current rally appears as a normal market reaction amid a longer-term downtrend.

Graph by MetalMiner using LME data.

Graph by MetalMiner using LME data.

Aluminum remains in a falling market and prices could certainly remain low for the rest of the year.

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For the past few years, this decline in aluminum prices and a surge of the US Midwest (MW) premium have led to a situation where the MW premium represents an ever-increasing percentage of the all-in cost. This has made it very difficult for companies to use the LME futures contracts as a gauge or benchmark for their aluminum purchases in North America.

Graph by MetalMiner

Graph by MetalMiner

Since buyers can negotiate a fixed cost for conversion and delivery, the part they need to forecast translates to the LME price + MW premium. Up until 2012, the MW premium remained stable and accounted for as little as 5 percent of the hedge. However, this is not the case anymore. In 2014, the MW premium remains volatile and currently makes up 20 percent of the cost that needs to be hedged.

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An upward-trending MW premium and low aluminum prices will likely make it impossible for buyers to use LME futures contracts as an effective benchmark for pricing or an efficient hedge. What should the North American aluminum buyer be looking at for an indication of future pricing?

We will analyze this in Part Two – but there’s also a free webinar that will provide our outlook for North American aluminum prices, including MW premiums going forward:

Join us for a one-hour informative session featuring an aluminum market outlook (LME price + MW premium) and the potential benefits for aluminum buyers of the CME Group’s new physically backed ALI contract, scheduled to debut May 6, 2014.

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