As if aluminum buyers didn’t have enough to contend with, including long mill lead times and rising conversion premiums, they are also dealing with a rising Midwest premium.
Furthermore, Russia’s move to impose a 15% export tax on unwrought aluminum has had a profound impact on the Midwest delivery premium.
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Midwest premium continues to soar
A recent Reuters article reports that the CME Midwest premium has jumped to a record high of $660 per ton ($0.30/lb). As a result, product manufacturers and their end users are facing an all-in price for unwrought raw material in excess of $3,000 per metric ton, even before conversion to product premiums are added in.
But the post goes on to explain that Russia’s export tax is not the sole reason for seriously elevated physical delivery premiums.
Over the last few years, the shift in exchange and off-market global inventory has been from North American and European markets toward Asia.
The reason for that trend is not hard to see. Hampered by smelter curtailments in Inner Mongolia and Yunnan due to energy caps and drought-induced low-hydro-power output, China has been a net importer of unwrought aluminum since Q2 of last year. This has driven a rundown in Western exchange and off-warrant inventory to locations convenient for onward shipment to China.
Long load-out queues at Port Klang
Reuters reports that as of the end of May, Malaysia’s Port Klang warehouses held over 868,000 tons of warranted LME aluminum, some 85% of the LME’s total. In addition, it had nearly 870,000 tons of off-market stock stored in adjacent facilities with the option to deliver onto the exchange or for onward shipment to China.
To make matters worse, the LME’s Malaysian Port Klang warehouses are currently facing a 168-day load-out queue, adding to delays in securing physical metal.
Not surprisingly, the meager stocks remaining in Europe (7% of the LME’s total), and the U.S. (just 3% of the LME’s total) are a graphic reflection of the tightness that is the current unwrought physical aluminium market.
Further rises ahead for Midwest premium?
According to the post, Citibank is suggesting the U.S. Midwest premium contract could peek at around $0.35/lb or over $770 per metric ton this year as increased prices feed through from Russia and supply from Canada’s quota-capped smelters fails to meet robust demand in the U.S. market.
The Russian authorities’ stated time frame for the new export tax is from August to December. However, there would be nothing to stop them extending this well into next year if demand remained sufficiently robust. That would suggest that while the Midwest premium may peak in the second half of this year, it could remain elevated for much of 2020 as well.
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