Heads-Up, Aluminum: Reading the Key January Indicators
Aluminum premiums in the Midwest
Previously in this series, we talked about how US Midwest aluminum premiums have strengthened so far in January. Apparently, in this region, aluminum premiums have been on an uptrend since the end of October, and the news of supply cutbacks by Alcoa (AA) and Century Aluminum Company (CENX) has helped US Midwest aluminum premiums. The proposed cutbacks will likely further limit aluminum supply in the US.
Aluminum has been in a deficit in the US for years, and US aluminum production has continued a falling trend, as can be seen in the graph above. While US aluminum demand has been rising, no new aluminum smelter has been set up in the country for more than 35 years. The most recent smelter in the US is the Mt. Holly plant, which opened in 1980, and this demand-supply mismatch has made sure that US aluminum buyers have continued to rely on aluminum imports or LME (London Metal Exchange) warehouses for their needs.
Recent cuts in aluminum production
With recent production cutbacks, aluminum production in the US (VTI) will likely fall further and thus support premiums. However, we might not see a major bounce back in premiums.
To be sure, some of the proposed cutbacks have been partially rolled back. Alcoa is now keeping its Intalco smelter running until the end of 2Q16, as opposed to its previously announced closure at the end of 1Q16. Earlier, Alcoa kept the Massena West smelter running after receiving state support. Century Aluminum is also running the Mt. Holly smelter at half its rated capacity after having previously announced a complete shutdown.
Falling unit production costs
Reduction in raw material costs has helped aluminum producers to keep their plants running despite lower aluminum prices. Moreover, the supply cuts announcement helps companies like Alcoa and Century Aluminum build pressure on their respective power suppliers to negotiate fresh contracts at lower prices. Alcoa even managed to get state support to keep the Massena West smelter running.
You can also consider the Materials Select Sector SPDR ETF (XLB) to get a diversified exposure to the materials sector. Together, Alcoa and Ball Corporation (BLL) make up 4.5% of XLB’s total portfolio.
But what else might hamper this uptrend in US aluminum premiums? Continue to the next part of this series to find out.
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