US aluminum futures rally as freight costs continue to rise

CME Group's AUP Midwest aluminum premium futures moved higher during the week ended May 10, as backwardations tightened into 2022, with rising freight costs supporting prices further into 2021.

The futures contracts trade on CME Globex and CME Clearport and settle on a monthly basis against the S&P Global Platts Midwest transaction premium.

Supply continues to remain tight as it is hard for mills to find labor and transportation, along with a tight scrap market. Increased demand for P1020 and aluminum slabs came from mills that were unable to obtain scrap for the month of May.

Platts US Midwest premium hit a record high of 26.10 cents/lb on May 4 and has held there since. Backing out the 12.263 cents/lb import duty as of May 7, the US Midwest premium is still below 2015 levels when there were extended LME warehousing queues. Market sources have said replacement costs are now pushing 30 cents/lb.

The May contract settled up 0.60 cent/lb on the week to 26.10 cents/lb on May 10.

The May/June spread tightened slightly to a 1.15 cents/lb backwardation on May 10, as inventories have continued to draw on steady demand and traders continuing to restock especially into Toledo, New York, and Baltimore.

"There is some [small] stock in Detroit but freights to get to a consuming location remain high," a trader said.

With the backwardation steepening again further out, market participants are still actively selling the front-month contracts and buying further dated strips in 2021 to capture some of the backwardations and restock inventories.

The June/July spread loosened from 2.79 cents/lb to around 2.20 cents/lb, as July/October spread tightened to settling at 1.825 cents/lb backwardation on May 10.. Positions have been rolled from Q4 to Calendar 2022 as some very light selling was seen in Q3 and Q4. The Q3/Q4 spread tightened as well, settling just under a 2 cents/lb backwardation.

"We could see higher freights into Q4," a second trader said.

The Q4 strip was bid slightly higher on the week to 20.50 cents/lb as continued activity was seen at lower levels in 2022. Fresh buying came into the market in Calendar 2022 at 17.75 cents/lb on May 6 followed by H2 2022 trading 17.25 cents/lb on May 10. This tightening H2 2021/Calendar 2022 to around a 4 cents/lb backwardation, as the market started to price in some relief in freight costs and some increase in import flows.

• AUP total volume was 1,098 lots or 27,450 mt for the week ended May 7. Open interest finished the week at 22,445 lots, up 375 lots from the April expiration which lost 2,898 lots.
• The spot to six-months spread settled at a 5.175 cents/lb backwardation on May 10
• The cash/three-month spread on the LME settled at a $12.15/mt contango
• The cash/December spread settled at a $21/mt contango
• Net speculative long position on the LME has risen to 42% of OI as of the May 5 close, approaching 2017 highs; Marex
• US primary aluminum production for April was 72,896 mt, down 3.1% mom; Aluminum Association
• Canadian primary aluminum production for April was 267,452 mt, down 3.3% mom; Aluminum Association

The spot-to-six months premium spread held its backwardation over the previous week and has averaged 5.375 cents/lb during that time.

The last Commitment of Traders report by the Commodity Futures Trading Commission showed that as of the May 4 close, long positioning by swap dealers decreased by 1,217 lots during the week to 12,194 lots, as spread activity decreased by 128 lots to 892 lots. The short positions by managed money decreased by 173 lots at 998 lots.

"We try and import from other countries but the freights are astronomical," a consumer said.

US Census March data released May 4 showed 124,392 mt of primary unalloyed aluminum were imported into the US, down 26.42% year on year. Imports from Canada were up 11.7% month on month to 106,176 mt. The monthly increase could keep additional tons from coming in from the Kitimat smelter in British Columbia, Canada and supply the Southern US as market sources say that region has traded up to a 1.75 cents/lb premium to the Midwest on tight supply.

The US Trade Representative has not given any further guidance on quota amounts for 2021, keeping the Canadian supply of P1020 in the US tight and increasing upcharges on higher purity metal such as P0610 and P0506.

Even with Canada shifting much of its primary aluminum production to value-added products, the market continues to run short as the US spot 6063 billet premium hit 22 cents/lb on April 15 and has remained there since.