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US aluminum futures continue to rally on supply tightness

Highlights

RTA cuts BC Works smelter production by around 35%

Supply remains tight and logistics bottlenecks continue

CME Group's AUP Midwest aluminum premium futures curved continues to rally through 2022 on July 26, as backwardations eased and buying came into the latter part of the 2021 curve and into 2022 on ongoing supply concerns.

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The Unifor Union strike at Rio Tinto's BC Works (Kitimat) smelter, along with rising freight costs, supported aluminum futures.

Rio Tinto announced July 26 that it would cut production at it's BC Works smelter by around 35% of the smelter's 432,000 mt annual capacity.

"The Kitimat strike means less production but not a full shutdown, no one has been doing anything until we get more information," a trader 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 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 32 cents/lb on July 26 and has held there since, backing out the 12.721 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 35 cents/lb.

The July contract settled up 0.277 cent/lb on the week at 30.277 cents/lb on July 26.

The July/August spread continued to widen, settling at a 0.473 cent/lb contango on July 26 after trading at a 0.50 cent/lb backwardation on July 7, as August traded up to 31 cents/lb ahead of the strike at RTA's BC Works smelter and as inventories continued to draw on steady demand and traders try to restock, especially into Baltimore and the Gulf.

Supply remains tight as traders look to restock

The July/October spread also widened settling at a 0.023 cent/lb contango. Some rolling of positions continued especially from August through the first half of 2022.

The Q3/Q4 spread eased in the week ended July 24, trading around a 0.30 cent/lb backwardation, as Q4 hit the 30 cents/lb mark on July 23.

The fourth quarter saw more activity week on week, as some positions were rolled into in Calendar 2022 which traded up to 25.40 cents/lb on July 21 and the first half 2022 strip traded up to 27 cents/lb on July 23 as some buying has come in through banks from consumers.

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

With the easing backwardations 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.

  • AUP total volume was at 1,187 lots, or 29,675 mt, for the week ended July 23. Open interested finished the week at 21,592 lots, up 778 lots from the July 16 close.
  • Spot/six-month premium spread settled at a 3.70 cents/lb backwardation on July 26
  • Cash/three-month spread on the LME settled at an $8.10/mt contango
  • Cash/December spread on the LME settled at an $8/mt contango
  • Net speculative long positioning on the LME dipped to 7.3% of OI as of July 22 close

The spot-to-six months premium spread held its backwardation over the previous week and averaged 3.994 cents/lb during that time.

The last Commitment of Traders report by the US Commodity Futures Trading Commission showed that as of July 20 close, long positioning by swap dealers increased by 312 lots during the week to 12,233 lots with spread activity up 13 lots to 456 lots. The short positions by managed money increased by 20 lots to 691 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 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 and as the announcement from Russia on an export tax has supported the US spot 6063 billet premium hit 23 cents/lb on June 17 and has held that level.