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US aluminum futures curve continues to rally on freight costs

Highlights

AUP total volume totaled 2,023 lots, or 50,575 mt, for the week ended June 4. Open interest finished the week at 22,690 lots, up 319 lots from the May expiration, which lost 3,479 lots.

The spot-to-six-months spread settled at a 4.65 cents/lb backwardation June 7.

The cash/three-month spread on the LME settled at a $5.24/mt contango.

Cash/December spread settled at a $14.24/mt contango.

Net speculative long positioning on the LME dipped to 21% of OI as of the June 3 close: Marex.

CME Group's AUP Midwest aluminum premium futures continued their rally during the week ended June 7 as the whole curve was bid higher with positions rolled into the first half of 2022, pushing prices higher for longer because of rising freight costs and strong demand.

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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.

As the labor and scrap markets remain tight, increased demand for P1020 and aluminum slabs came from mills unable to obtain scrap requirements for May.

"Not easing up anytime soon," a consumer said.

Platts US Midwest premium hit a record high of 27.40 cents/lb on June 7. Backing out the 11.965 cents/lb import duty as of June 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 June contract settled up 1.40 cents/lb over the past two weeks to 27.10 cents/lb on June 7.

The June/July spread has tightened significantly to a 1.57 cents/lb backwardation, as inventories have continued to draw on steady demand and traders continued to try to restock, especially into Toledo, New York and Baltimore.

"Market still moving higher because of logistics," a 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.

The July/October spread also moved in a stronger backwardation June 7, settling at 2.78 cents/lb. Some long positions have been rolled into H2 2021 and Q1 2022 as fresh buying has come in across the curve. The Q3/Q4 spread tightened as well, settling at a 2.20 cents/lb backwardation, with Q3 trading up to 25.35 cents/lb and Q4 trading up to 22.50 cents/lb on CME Clearport during the week ended June 7.

The July contract traded 535 lots during the week ended June 7, as the contract traded up to 26.25 cents/lb, 1.75 cents/lb higher on the week.

The Q4 strip continued its recent rally gains, moving higher by another 1.50 cents/lb to 22.50 cents/lb, as activity was also seen in H1 2022 at slightly higher levels, with Q1 2022 trading at 20 cents/lb and Q2 2022 trading at 19.15 cents/lb. The Q4 2021/Q1 2022 loosened to around a 2.50 cents/lb backwardation, as the market started to price in some relief in freight costs and some increase in import flows but at higher levels than the week prior.

The spot-to-six months premium spread held its backwardation over the previous week and has averaged 4.542 cents/lb during that time.

The last Commitment of Traders report by the Commodity Futures Trading Commission showed that as of the June 1 close, long positioning by swap dealers increased by 360 lots during the week to 13,381 lots, as spread activity increased by four lots to 945 lots. The short positions by managed money increased by 134 lots to 1,142 lots.

The US 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 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.

The US Census Bureau is set to release April import data June 8.

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.