US aluminum premium futures hold backwardation as supply continues to draw

The CME Group's AUP Midwest aluminum premium futures forward curve held its steep backwardation on June 21, with the back half of the curve rallying slightly as some positions continued to be rolled from the fourth quarter into Q1 2022.

As the labor and scrap markets remain tight along with rising freight costs, increased demand came in for P1020 and aluminum slabs from mills unable to obtain monthly scrap requirements.

"Lead times and trucking are still an issue," a trader said.

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. Platts US Midwest premium hit a record high of 27.40 cents/lb on June 7, and has held there since, backing out the 11.785 cents/lb import duty as of June 18, the US Midwest premium is still below 2015 levels when there were extended LME warehousing queues. Market sources said replacement costs are now pushing 30 cents/lb.

The June contract settled unchanged on the week at 27.25 cents/lb on June 21.

The June/July spread was relatively unchanged at 1.15 cents/lb backwardation, as inventories continued to draw on steady demand and traders tried to restock, especially into Toledo, New York and Baltimore.

"Some of the large warehouses are still seeing big drawdowns each month," a second trader said.

With the backwardation holding 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.

Backwardations hold

The July/October spread held its backwardation settling at 3.83 cents/lb. Some rolling of positions continued especially from Q4 to Q1 2022 as fresh buying continued to come in across the curve. The Q3/Q4 spread loosened during the week, trading around a 2.35 cents/lb backwardation, with Q3 trading up to 25.25 cents/lb and Q4 trading up to 22 cents/lb on the CME during the week ended June 18.

The Q4 strip was bid back above 25.25 cents/lb, as positions rolled from Q4 2021 to Q1 2022, with 360 lots trading in the spread from 2.35 cents/lb to 2.85 cents/lb backwardation. The spread was relatively unchanged on the week, as the market started to price in some relief in freight costs and increase in import flows.

• AUP total volume for the week ended June 18 was 1,122 lots or 36,150 mt. Open interest finished the week at 23,587 lots, up 293 lots from the June 11 close.
• Spot/six-month spread settled at a 5.53 cents/lb backwardation on June 21
• Cash/three-month spread on the LME settled at a $21/mt contango
• Cash/December spread on the LME settled at a $29.75/mt contango
• Net speculative long positioning on the LME fell to 13% of OI as of the June 17 close; Marex

The spot-to-six months premium spread held its backwardation over the previous week and averaged 5.576 cents/lb during that time.

The last Commitment of Traders report by the US Commodity Futures Trading Commission showed that as of the June 15 close, long positioning by swap dealers rose by 173 lots during the week to 12,612 lots, as spread activity was unchanged at 942 lots. The short positions by managed money increased by 126 lots to 924 lots.

The Commerce Department has officially set a June 28 start date for the proposed Aluminum Import Monitoring and Analysis system and clarified certain licensing requirements for the program.

The Census Bureau April trade data showed that imports from Canada reached 140,088 mt, up 36.9% month on month but still down 12.98% from April 2020.

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.

Traders have been cautious on imports from Canada where they are the importer, market sources have said.

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 23 cents/lb on June 17.