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Listen: Aluminum swaps contango on strong US Midwest

Aluminum premium swaps on the Chicago Mercantile Exchange have been in contango. Spot market premiums have been surging this year.

In this podcast, S&P Global Platts Regional Manager for Metals Derivatives Petter Kolderup and Senior Editor for Physical Metals Market Mayumi Watanabe discuss the forward curve structures and how the paper and physical markets are impacting each other.

We welcome any feedback or suggestions for topics. Contact us at

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Podcast Transcript

Aluminum swaps contango on strong US Midwest

by Mayumi Watanabe, Petter Kolderup

Mayumi Watanabe: Welcome to the latest Commodities Spotlight podcast from S&P Global Platts. I'm Mayumi Watanabe, senior editor covering physical aluminum market in Tokyo. I am joined today by Petter Kolderup, regional manager for metal derivatives in Singapore. Hi Petter!

Petter Kolderup: Hi Mayumi!

MW: Petter will be sharing with us his valuable insights into the recent aluminum paper swap markets. The US Midwest spot premium stands at 13 cents/lb, which is the highest in the last two and the half years, and up almost 40% from January 2. Such a steep rise does not happen very often in the physical market. How is the Midwest premium paper market?

PK: It is interesting to see contango in such a firm spot market. The March contract is valued at a 1.92% premium to spot, with the rest of the forward curve in a very flat structure all the way out to cal19 and cal20.

Usually contango is associated with bearish spot markets, with a forward curve indicating mean reversion. In this case the spot is at a very high level, as you said the highest in the last two and a half years. Clearly the market believes that the firmness will continue, and that future supply and demand factors will drive up prices further.

MW: You are right. The swap curve is flat at 13.25 cents/lb for sixteen months from March to June 2019, according to Chicago Mercantile Exchange website. The spot premium is high because of transport issues in the US, the uncertainty over the Section 232 investigation, as well as the lock out at the ABI smelter in Canada.

Not many people believe the US spot premium will rise to the record high of 24 cents, but few people think 13 cents/lb is the limit. Market participants say if the Trump administration decided to impose import tariff, the premium will rise further.

The Platts CIF Japan spot premium is at $95-$109.50/mt, or midpoint of $102.25. Japanese premiums have risen but not so steeply like in the US, up by 10% from the beginning of this year. How is the forward curve structure?

PK: The forward curve is also in a slight contango to the spot index. It is probably linked to the contango that we see in the US Midwest market.

Again the forward structure is very flat as a result of strips trading. However looking at the US Midwest market which is a lot more liquid we see trading at the same price irrelevant of expiry. It would be interesting to see some time spreads down the curve. Further the US Midwest market is trading daily, whereas the MJP is trading more sporadically. In periods with thin liquidity the forward curves from the exchanges can give unreliable information. The forward curve might be old, and not representative of the real market.

High bid/offer spreads could also move the forward curve more than in more liquid markets.

MW: The Japanese swap bid offer spread happens to be a few dollars this week, rather tight, because there were some trades, according to one broker. About a year ago, it was more common to see a wide spread of $8 to $10/mt.

May be there is a little increase in the liquidity this year in the swap market?

PK: Well, open interest is certainly growing in the MJP swaps market. In the beginning of the year, the interest was 9,052 contracts compared to 5,086 beginning of last year.

MW: In the physical market, the bid offer spread is $15 apart, and it is very illiquid. Japanese buyers don’t want to increase stocks before the financial year closing at the end of March, and sellers would rather ship their supplies to the US.

Looking at a broader industry-wide picture, the US, Japanese and the European aluminum premium swaps are in contango, but iron ore and coking coal are in backwardation. Will market participants be losing money when spreads turn into backwardation?

PK: Market participants can lose or make money, irrelevant of the market turning from contango to backwardation or the other way around. I wouldn’t focus so much on if the market is in contango or not. More relevant is where the prices will go next. You always hear “buy low, sell high” but it is also possible to “buy high, and sell even higher”. Markets are usually either trading in a range or trending. It’s important to identify what market environment you are in.

If the market is in a strong up going trend, buying high can make sense. If you look at the LME aluminum cash market, it has seen a good bull run since the bottom in November 2015, with an almost un-interrupted linear growth in prices. The market is already through resistance levels from 2014 and 2012.

If you look at Chinese steel prices, the price growth has been more choppy, and not managed to penetrate resistance levels from previous years, the same way as aluminum. Steel margins are also lower now, which could indicate some limitations to further upside in steel prices and the raw materials.

MW: Thank you very much Petter for your deep insight, and thank you every one for listening. You’ll be able to find out more about the aluminum paper markets n