Booming demand and shipping costs feed aluminum rally

The physical market premium in the United States, paid on top of prices traded on the LME, has climbed to $400 a tonne from $320 a tonne in January.

Part of the problem is quota restrictions on Canadian exports to the United States.

“Decade-high ocean freight rates, high inland truck rates, logistical bottlenecks, mudslides (in Canada) and snow storms have seen the costs of delivering aluminum skyrocket,” said Jorge Vasquez, founder of consultancy Harbor Aluminum.

“The uptrend continues. The premium has rallied toward the costs of replacing metal sold or consumed.”

The forward curve shows US aluminum premiums rising over the next few months and staying at elevated levels until December, while those for Europe are expected to stay high until September next year.

Physical market premiums in Europe stand at $179 a tonne, up nearly 40% since last November.

“The sharp upturn in end-use demand has been particularly impactful for aluminum premia because consumer supply chains destocked heavily as smelters shifted sales into ingots for traders in 2020,” Citi analysts said in a note.

“The challenges of restocking and restarting fabricating capacity are common themes we hear across markets from steel to semiconductors.”

Large amounts of aluminum held in financing deals, a feature of the aluminum market for more than a decade since the 2008 financial crash, are an issue for the market.

These deals involve commodity traders buying surplus aluminum and selling it for a future date, taking metal off the market and locking it up for months, sometimes years.

“Rising premiums are a means the spot market seeks to rebalance by attracting units out of financing deals,” Citi said.

(By Pratima Desai)