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Aluminum premiums high on demand recovery, supply chain disruption and lingering tariff impacts

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Commodity Tracker: 5 charts to watch this week

Aluminum premiums high on demand recovery, supply chain disruption and lingering tariff impacts

If the old adage about water always finding its lowest point is accurate, global aluminum markets must be dry as a bone.

It's no secret that regional aluminum premiums from Asia to Europe to the Americas are all currently at multi-year highs.

The S&P Global Platts US Midwest Transaction Premium (MWP) topped 23.1 cents/lb on April 15, surpassing the multi-year high of 22.5 cents/lb reached in April 2018 in the wake of then-recently implemented US Section 232 import tariffs and sanctions. It is also approaching an all-time high of 24.25 cents seen in early 2015.

Platts CIF Japan Premium (MJP) was at $154/mt on April 15—the highest it's been since May 2018. Platts Good Western duty-paid in-warehouse Rotterdam premium was at $225/mt on April 15, also a level that, before last month, it had not reached since May 2018.

Platts DDP Southeast Brazil premium has been hovering at $330/mt or more since January, and since September 2020 hasn't slipped below $300/mt—a threshold that hadn't been breached since September 2018.

global aluminum premiums 2014-2021

So, what's driving the elevated aluminum premiums? There's no single answer, and the dynamics are global, rather than limited to one region or another.

Supportive factors collide

Off the top, demand simply is outstripping supply as the world inches toward a post-pandemic scenario. But that's been compounded by sky-high shipping and freight rates, supply chains still disrupted more than a year after COVID-19 first emerged, and import tariffs that continue to redraw traditional trade routes more than three years after being announced. Scrap recycling also has been affected by reduced generation and collection, impacting production.

In the US, where consumers depend on imports for up to 90% of their P1020 aluminum supply, market sources say the MWP is still a few cents below where it would make economic sense for exporters to ship material in large quantities. And in any case, import lead times can be three to six months.

Total US primary unwrought aluminum imports were down 13.8% on year in 2020 to nearly 3.28 million mt and down 33% from the peak year of 2017, according to the latest government data. Imports of P1020 or greater purity, at nearly 1.89 million mt, were down 33% in 2020 from peak year 2017.

A lack of clarity regarding the longevity of Section 232 tariffs under the new Biden presidential administration—as well as quotas on Canada and other suppliers—has caused uncertainty throughout the market. Year-on-year Canadian P1020 exports to the US were down 46% in September through December 2020, to 291,778 mt, government data showed.

Demand ramps up in Brazil, Japan

Brazil is also a net importer of P1020, but as Asian freight rates surged to as high as $10,000 per container, Asian-origin material—as well as material from the Middle East and Australia—vanished from the domestic market.

Consumers in Brazil winnowed down inventories early during the pandemic and then were caught empty-handed when demand swung back after a year-end government stimulus plan was put in place. Producers were caught by surprise as well and have struggled to catch up.

In Europe, record-high freight rates have made it uneconomical to import new stocks from Asia or elsewhere. At the same time, with recent strong arbitrage opportunities in China, Russian units—a natural source for Europe's duty-unpaid stocks—were diverted to the Far East.

In Japan, market participants have said that while shipping tightness and freight rates have eased somewhat, it could take several months to work back toward normal. Domestic demand for aluminum beverage cans, as well as autos, has been solid. And Japan's financial year has just kicked off, so buying has begun again in earnest after many held off in March to close out inventories and order books.

At the same time, aluminum producers globally have been focusing on value-added products with higher margins, rather than P1020, reducing supply further and sending the market scrambling for ingots to convert into billets.

Demand for billets has been strong due to 2020 construction projects, delayed during the pandemic, restarting alongside new projects given the go-ahead as COVID restrictions ease. The Platts US aluminum billet upcharge was assessed at an all-time high of 22 cents/lb on April 15, having surpassed the previous high of 17 cents reached in May 2018.

Some expect the auto industry, hampered in recent months by a global semiconductor shortage, to see a surge in demand too, as lockdowns are lifted in a number of regions and consumers cooped up during quarantine emerge with money saved to buy new cars. A good number of those new vehicles are likely to be electric-powered, which rely heavily on aluminum and other metals for their batteries.

Just as the market factors driving elevated global aluminum prices are easy to see, it seems those same dynamics are unlikely to change anytime soon.

And depending on their perspective, aluminum market participants are likely to be feeling either high and dry or all wet in the near term.