Rising aluminum physical delivery premiums — feature of a tight market

aluminum ingot stacked for export
Olegs/Adobe Stock

In a recent webinar MetalMiner ran for key clients, we posed a question regarding the recent rise of aluminum physical delivery premiums: what was behind rises and would they last?
Physical delivery premiums are a significant cost to consumers. It can be a cost that is hard to hedge except for large consumers with access to exchange-traded financial hedging instruments.
So, understanding what is driving higher premiums is helpful in terms of judging the likely trajectory of future metal costs.
Are rising MW premiums causing concern? See how service centers take advantage of that. 

Rising aluminum physical delivery premium

There are several platforms for reporting physical delivery premiums. For the US, the CME is the probably the best.
Reuters illustrated the relentless rise of the aluminum physical delivery premium since the start of Q4 2020. The Midwest Premium is now back above $400 per metric ton, a level not seen in two years.
If it is any consolation to our US readers, North America is not alone in seeing rising costs.

Both the primary metal price as displayed on the LME and the aluminum physical delivery premiums have been rising globally.
In Europe, physical delivery premiums have jumped to three-year highs. Meanwhile, in Japan — the third global benchmark — premiums have hit six-year highs.
The reasons for the rises are nuanced by region. However, the rises are in large part directly a result of — yes, you guessed it — Chinese demand.

China’s transition to net importer

China turned last year from being more or less neutral on imports/exports to a significant net importer. This came as the economy roared back from pandemic lockdowns and the SHFE price surged to a substantial premium over global LME prices.
The resulting arbitrage has sucked in imports of both pure and alloy ingot. China imported nearly a quarter of a million tons of primary and over 140,000 tons of alloy metal in just the first two months of this year. That brought its cumulative net totals to 1.3 million tons of primary and 1.1 million tons of alloy since the start of 2020.
Imports like that, much on spot markets or via traders, has sucked exchange traded and shadow market metal east, placing it conveniently for short onward shipment to China.
As a result, there is less metal available in warehouses in Europe and the US.

Eastward shift

Reuters reported over 90% of the registered stocks on the LME are now in Asian warehouses. Port Klang in Malaysia, China’s preferred source of remelted aluminium scrap alloy ingot supplies, holds much of that supply.
Meanwhile, European locations hold a total of just 136,000 tons, Reuters added. Furthermore, those in the US hold just 44,000 tons of aluminium ingot.
The same geographic distribution is evident in LME shadow stocks, Reuters states. The exchange’s most recent off-warrant stocks report shows 1.63 million tons of shadow stocks at the end of January. Of that total, 1.38 million tons were sitting at Asian locations.
That leaves scant stocks for European or US consumers, such as billet makers, cast houses, extrusion and rolling mills. The resulting tug of war for supplies is what is driving physical delivery premiums higher.
In the US, consumers hoped for a relaxation on the Section 232 10% import tariff. Indeed, a number of countries have been granted a waiver — but with strings attached.
Canada is by far the largest primary metal supplier to the US. However, the US applied a quota as part of the waiver deal with Canada. As such, supplies of increasingly scarce ingot remain constrained by the quota.

What’s next for the aluminum physical delivery premium?

China’s pull on the rest of the world’s aluminium supply does not appear to be abating.
Beijing has tried to cool speculative activity, which is undoubtedly playing a part in the SHFE price premium.
But counterforces are at play.
A wider environmental crackdown on high energy consuming industries like steel, concrete and, yes, aluminum has resulted in the temporary closure of some smelting capacity at times and is inhibiting the licensing of new plants.
Are high premiums here to stay?
Never say forever.
But for this year, at least, they look like they are going to be a feature of the aluminum landscape we are going to have to live with.
Does aluminum content call to you? We’re rolling out more on LinkedIn.

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