6 Mar

Physical Premiums Provide Some Succor to Aluminum Producers

WRITTEN BY Mark O'Hara FEATURED IN Company News, Insights, & Analysis

Physical premiums

In the previous article, we noted that aluminum prices have been weak this year. However, looking at aluminum’s pricing dynamics, we can see that there is also a component of physical premiums along with aluminum prices.

Simply put, along with aluminum prices, buyers also pay a physical delivery premium. Some companies, such as Alcoa (AA), see delivery premiums as a better indicator of aluminum markets. These premiums represent physical market sentiments because they’re settled between buyers and sellers directly.

Physical Premiums Provide Some Succor to Aluminum Producers

According to Platts, “The Platts Midwest premium has risen 55% so far this quarter, fueled by political uncertainty.” Aluminum premiums in Japan have also increased, and 2Q18 offers are higher compared to 1Q18. While lower aluminum prices could dent aluminum producers’ earnings, they could find some succor in higher physical premiums.

Alumina prices

However, alumina prices have weakened this year. We saw a spike in alumina prices last year, and the aluminum-making raw material reached its all-time high in October 2017. However, prices could not hold at those levels, and we saw them tapering down.

We should remember that companies such as Rio Tinto (RIO) and Norsk Hydro (NHYDY) are long on alumina and are therefore negatively impacted by falling alumina prices (AWC). On the other hand, Century Aluminum (CENX) stands to gain from lower alumina prices because it buys its alumina from outside parties.

In the next article, we’ll see how Alcoa looks amid the current commodity pricing environment.

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