US aluminum futures trading cautious as backwardation steepens into 2022

CME Group's AUP Midwest aluminum premium futures forward curve weakened slightly during the week ended Aug. 30, even as spot market remains close to record highs and freight concerns remain intact.

Backwardations have steepened throughout the curve on ongoing supply and logistics concerns thru the fourth quarter and ahead of contract season.

The labor and scrap markets remained tight. Elevated freight costs and solid demand for P1020 and aluminum slabs from mills unable to obtain monthly scrap requirements have supported premiums.

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

The premium sat just below the record high at 34.50 cents/lb on Aug. 27 and backing out the 13.666 cents/lb import duty, it was still below 2015 levels when there were extended LME warehousing queues. Market sources said replacement costs could be pushing 38 cents/lb or even slightly higher.

Logistic issues still supporting premium

The August/September spread eased during the previous two weeks, settling at a 0.943 cent/lb backwardation on Aug. 30. September traded up to 33.50 cents/lb. The September/October spread traded tighter to around 1.50 cents/lb and as inventories continued to be drawn on steady demand and as traders tried to restock — especially into Owensboro and the South as market sources have noted ample Toledo, Ohio, warehouse stocks. Also noted are high costs to move metal from Midwest Terminal Toledo further inland.

The August/October spread tightened slightly as spot bid-offer ranges and transactions continued to remain firm, settling at a 2.693 cents/lb backwardation. Some rolling of positions continued, especially into 2022 contracts as fresh buying has come into the first half of 2022 and open interest continued to rise.

The Q4 21/Q1 22 spread held steady during the week ended Aug. 27, trading around a 4.60 cents/lb backwardation, as the Q1 2022 strip traded lower at 27 cents/lb.

The 2022 contracts had more activity week on week, as fresh buying came in the market, with Q2 2022 trading down to 25.75 cents/lb and Q2 2022 traded at a 2 cents/lb backwardation to the second quarter strip. Activity has continued to come in through banks from consumers.

"Freight issues will not be resolved this year and will spill into Q1," a trader said

With the backwardations holding out farther, market participants can still actively sell the front-month contracts and buy forward-dated strips in 2021 to capture some of the backwardations and restock inventories.

• AUP total volume for the week ended Aug. 27 was 1,004 lots, or 25,100 mt. Open interest finished the week at 23,188 lots, up 409 lots from the Aug. 20 close.
• Spot/six-month spread settled at a 7.50 cents/lb backwardation on Aug. 30
• Cash/three-month spread settled at a $25.75/mt backwardation on Aug. 27
• Dec 21/Dec 22 spread settled at a $41/mt backwardation
• North American aluminum demand estimates for H1 2021 are expected to total 13.203 billion pounds, up 16.6% you: Aluminum Association

The spot-to-six months premium spread held its backwardation over the previous week and averaged 7.91 cents/lb during that time.

The last Commitment of Traders report by the US Commodity Futures Trading Commission showed that as of the Aug. 24 close, long positioning by swap dealers increased by 592 lots during the week to 12,736 lots, with spread activity up 83 lots to 701 lots. The short positions by managed money increased by 165 lots to 834 lots.

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 about imports from Canada where they are the importer, market sources said.

Even with Canada shifting much of its primary aluminum production to value-added products, the market continued to run short. The announcement from Russia on an export tax has supported premiums globally.

"Billet demand is everywhere and don't expect that to change with all the backlogs," a second trader said

The US spot 6063 billet premium held 28 cents/lb on Aug. 26, with tradable values as high as 30 cents/lb.