April US Midwest aluminum premiums

We’ve already seen how aluminum prices have largely traded sideways in 2015. However, US Midwest aluminum premiums fell to $0.185 per pound on April 9, the lowest level since April 23, 2014.

The premium is simply a surcharge that aluminum consumers must pay on top of prevailing prices in order to take delivery of metal from the warehouses. Aluminum premiums more than doubled in 2014. Aluminum producers like Alcoa (AA), Century Aluminum (CENX), and Vale S.A. (VALE) benefit from higher aluminum premiums.

Industry fundamentals

Aluminum is a hot product for investors. As a result, aluminum prices also reflect investor sentiment, apart from the dynamics of the aluminum industry. According to Alcoa, these premiums are a better indicator of aluminum industry dynamics than actual aluminum prices. Currently, Alcoa forms 3.30% of the Materials Select Sector ETF (XLB).

Aluminum buyers like Coca-Cola (KO) and Crown Holdings (CCK) have long complained about high aluminum premiums. These companies argue that physical aluminum premiums have been kept artificially high to benefit aluminum producers and warehouses that store physical metal.

Aluminum premiums are down

The above chart shows the movement in US Midwest aluminum premiums. They are down by almost a quarter this year, registering a decline each month of the current year. Lower aluminum premiums are negative for all aluminum producers. Companies like Alcoa reported record profits last year as aluminum premiums surged.

Alcoa gets a major part of its revenues from Europe. It’s therefore important for its investors to monitor regional premiums in Europe. In the next part, we’ll discuss the latest trends in Europe’s aluminum premiums.