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US aluminum futures hit record highs on supply tightness

Highlights

Supply remains tight as traders look to restock

Strikes effect supply and slow transportation

CME Group's AUP Midwest aluminum premium futures forward curve continues to rally to record highs Aug. 2 following spot prices.

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Fresh buying, meanwhile, has come into the August and September contracts, with backwardations tightening further down the curve on ongoing supply concerns and the Unifor Union strike at Rio Tinto's BC Works smelter in British Columbia. Rio Tintoannounced July 26 that it would cut production at the smelter by around 35% of the smelter's 432,000 mt annual capacity. BC Works produced 329,000 mt of aluminum last year.

"If the strike remains longer than three weeks then they could start taking down potlines," a consumer said

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

The strike by Canadian border guards is also adding to delays and could affect transportation, market sources added.

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

The premium reached a record high of 34 cents/lb on July 30, backing out the 13.416 cents/lb import duty. It is still below 2015 levels when there were extended LME warehousing queues. Market sources said replacement costs could be pushing above 35 cents/lb.

The July monthly premium average settled at 30.691 cents/lb, while the July transaction price settled at 143.724 cents/lb.

The August/September spread held steady during the week trading around 0.50 cent/lb before settling at a 0.775 cent/lb backwardation on August 2, as September traded up to 33.25 cents/lb and as inventories continued to be drawn on steady demand and traders try to restock, especially into Baltimore and the Gulf.

Supply remains tight ahead of contract season

The August/October spread tightened as spot transactions continued to rise settling at a 1.144 cents/lb backwardation. Some rolling of positions continued, especially from August to September as fresh buying into those months and into Calendar 2022 as open interest continued to rise.

The Q4/Q1 22 spread eased in the week ended Aug. 2, trading around a 2.50 cents/lb backwardation, as the Calendar 2022 strip printed above 27 cents/lb.

The 2022 contracts saw more activity week on week, as fresh buying came in across the strip, which traded up to 27.40 cents/lb on July 28 for the first-half 2022 strip, buying has come in through banks from consumers.

"Global logistics bottlenecks and rising freight costs remain," a trader said.

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

  • AUP total volume was 2,086 lots or 52,150 mt for the week ended July 30. Open interest finished the week at 23,239 lots, up 1,647 lots from the July 23 close.
  • July 2021 AUP monthly volume total 6,039 lots
  • Spot/six-months premium spread settled at a 5.533 cents/lb backwardation on Aug. 2
  • Cash/three-months spread on the LME settled at a $2.75/mt contango
  • Cash/December 2022 spread settled at a $2.75/mt backwardation
  • Net speculative long positioning on the LME rose to 11% of OI as of the July 29 close: Marex

The spot-to-six months premium spread held its backwardation over the previous week and averaged 5.288 cents/lb during that time.

The last Commitment of Traders report by the US Commodity Futures Trading Commission showed that as of July 27 close, long positioning by swap dealers increased by 453 lots during the week to 12,686 lots with spread activity up 39 lots to 495 lots. The short positions by managed money increased by 65 lots to 756 lots.

The market will keep an eye on June US Census import data, which is due out on Aug. 5.

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 said.

Even with Canada shifting much of its primary aluminum production to value-added products, the market continues to run short. The announcement from Russia on an export tax has supported the US spot 6063 billet premium, which hit 26 cents/lb on July 22 and has held that level, with sales heard around the 30 cents/lb level.