Analysis: US aluminum premium futures continue to rally on supply

CME Group's AUP Midwest aluminum premium futures continued to rally during the week ended May 1 as supply constraints continued across primary aluminum and value-added products with the tightening scrap market.

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.

Supply continues to remain tight as it is hard for mills to find labor and transportation, along with a tight scrap market.

The April monthly premium average finished the month at 23.463 cents/lb, up 4.58 cents/lb month on month. The April transaction price average was up 10.575 cents/lb at 128.866 cents/lb.

The May contract settled up 3.20 cents/lb over the prior two weeks at 25.50 cents/lb on April 30.

The May/June spread narrowed slightly to a 0.856 cent/lb backwardation on April 30, as inventories have continued to draw on steady demand and traders continuing to restock especially into Toledo, New York, and Baltimore.

"Freights have quadrupled and you still can't find trucks," a consumer said.

With the backwardation steepening again further out, market participants are still actively selling the front-month contracts and buying further dated strips in 2021 to capture some of the backwardation and restock inventories.

The May/July spread tightened from 2.40 cents/lb to 3.646 cents/lb, as did June/July trading at a 2 cents/lb to 2.50 cents/lb backwardation on April 29. Positions have been rolled from Q2 to Q3 as some light selling was seen in Q3 and Q4. The Q3/Q4 spread tightened as well, settling above a 0.75 cent/lb backwardation, with the spread trading at 1 cent/lb backwardation on April 29 on CME Clearport.

"Freights are still going up, rail has been cheaper but harder to get," a trader said.

The spot-to-six months premium spread held its backwardation over the previous week and has averaged 4.695 cents/lb during that time.

The last Commitment of Traders report by the Commodity Futures Trading Commission showed that as of the April 27 close, long positioning by swap dealers increased by 73 lots during the week to 13,411 lots, as spread activity increased by 14 lots to 1,020 lots. The short positions by managed money increased by 20 lots at 1,171 lots.

The second-half 2021 strip recovered from some selling pressure the week prior, trading up to 20.50 cents/lb. The Q4 2021/Q1 2022 spread traded at a 1.25 cents/lb backwardation as the market started to price in some relief in freight costs and some increase in import flows.

"Prime and slab consumption has been up with the lack of scrap available," a producer said.

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.

US Census trade data for March will be released on May 4.

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.