Are Aluminum Smelter Closures Moving Physical Delivery Premiums?

2022-09-10 11:12:09 By : Mr. shuxiang chen

Stuart Burns | Posted on July 12, 2022 |

Soaring power costs in Europe wrecked havoc on the aluminum industry. In fact, several aluminum smelter sites have partially or temporarily shuttered this year. As most people know, power costs surged starting last year due to increasing oil and natural gas prices. However, Russia’s invasion of Ukraine turbo-charged this escalation. With Ukraine being a key transit territory, and Russian being the world’s dominant supplier of natural gas, this poses numerous problems.

Of course, rising energy costs are not a regional issue. Although the impact was not immediate, the global nature of the fossil fuels market raised costs in the United States. As a result, rising power costs in the US are impacting the viability of aluminum smelting. Late last month, Century Aluminum Company, the US’ largest producer of primary aluminum, announced it would temporarily idle its smelter in Hawesville, Kentucky. The firms said they were closing the facility for 9-12 months, or until energy prices fall to more sustainable levels. Hawesville has a reputation for being North America’s largest producer of military-grade Aluminum. In an already-constrained supply market, this loss will have a great impact. Like smelters in Europe, Century got caught between a falling LME/CME price and high energy prices. Typically, high energy prices would support higher aluminum prices, but this year’s market proved critically oversupplied. That’s why exchange prices have dropped despite persistently high power costs.

It’s not just Century feeling the pain. Last week, Alcoa Corporation announced it would begin curtailing one of three operating smelting lines at its Warrick facility in Indiana. The company cited “operational challenges” as the primary reason for the move. The company also assured customers that each of the three remaining lines have a capacity of about 54,000 tons per year. This leaves only 161,000 tons in operation. The move will come as a blow to the adjacent Kaiser rolling mill, which takes metal directly from Warrick site. That said, it remains unclear how much this will effect Kaiser in the future.

Sign up for MetalMiner’s upcoming free workshop “Best Ways to Achieve Immediate Part/Component Cost-downs.” Click here! 

Despite the global market enjoying a modest surplus, exchange inventories remain very low, and the market for physical metal remains tight. Indeed, the MW physical delivery premium had been falling from its March high – both for the LME and for the MW Premium. However, this graph from MetalMiner insights clearly shows that physical delivery premiums picked up late last month on the news of the US smelter closure.

Source: MetalMiner Insights Indeed, over the last few weeks, investor positioning across industrial metals flipped from long to short. For example, the net long on the CME copper contract hit 42,000 contracts at the start of April. Currently, the net short stands at 25,402 contracts, its most bearish positioning since April 2020. The same is true for Zinc despite there being virtually no stock in US exchanges and record lows throughout Europe. Get all the latest news on global aluminum markets. Sign up for the weekly MetalMiner newsletter here. 

At the moment, investors in the futures markets remain focused on the recessionary impact of high energy prices and rising Fed rates. Meanwhile, the physical delivery premium reflects the reality of metal supply on the ground – not just for Aluminum but for Zinc as well. The worry is that consumers could be caught between the apparent disconnect of a weakening LME price and a rising physical delivery premium. This is especially concerning as the MW premium responds to the tightening regional ingot market in the US.

So far, physical delivery premiums are yet to reach the levels seen in March of this year. However, they have ticked up nearly 10%. And while the summer season is normally pretty quiet, increasing volatility seems more likely. This outcome is all but assured if any further smelter closures (even temporary ones) occur. In that case, investors will move to disrupt the nature of the supply market amid the reality of regional shortages.

Keep yourself informed of changes in the metals marketplace with MetalMiner’s monthly MMI Report. Sign up here to begin receiving it completely FREE of charge. If you want a serious competitive edge in the metals industry, try a demo/tour of our revolutionary insights platform here.

Filed under: Commodities, Non-ferrous Metals, Supply & Demand

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Aluminum aluminum price aluminum price index anti-dumping China china aluminum coking coal price Copper copper price copper price index ferrochrome price ferromoly price Ferrous Metals GOES price Gold gold price Green India Iron Ore iron ore price L1 L9 LME LME aluminum LME copper LME nickel LME steel billet nickel price Non-ferrous Metals Oil palladium price platinum price precious metals prices rare earths scrap aluminum price scrap copper price scrap stainless price scrap steel price silver price Stainless Steel stainless steel price Steel steel futures price steel price steel price index

MetalMiner helps buying organizations better manage margins, smooth commodity volatility, generate cost savings and negotiate prices for metal commodities. The company does this through a unique forecasting lens using artificial intelligence (AI), technical analysis (TA) and deep subject matter expertise.

©2022 MetalMiner  All rights reserved. | Cookie Consent Settings & Privacy Policy | Terms of Service