US aluminum futures fall on softening demand to end the year

CME Group's AUP Midwest aluminum premium futures forward curve moved lower during the week to Nov. 1 as the entire curve saw trader selling from December and throughout Calendar 2022.

The structure of the curve continued to tighten over the last week as all-in spot prices fell from record highs. Offers by traders have moved lower on some slightly bearish signals in the market and aggressive trader forward selling of AUP futures.

The tight supply throughout most of the US, along with steady demand and global supply chain issues, are expected to remain come 2022.

The three-months aluminum price on the London Metal Exchange has fallen by 16% since October 8, even though production impacts, caused by magnesium shortages needed in alloys to form billet and declining inventories, supported prices.

The labor market remains tight, elevated freight costs, solid consumer demand for P1020 and aluminum slabs from mills unable to obtain monthly scrap requirements are expected to help support premiums. The spot scrap market remains tight for some prime grades as exports have increased by almost 15% year on year through August.

The futures contracts trade on CME Globex and CME Clearport and settle on a monthly basis against the Platts Midwest transaction premium.

The premium pulled back from recent all-time highs and was assessed at 31.45 cents/lb on Nov. 1, as market sentiment has diverged, with some traders seeing steady order flows and focusing on 2022 contracts, while others signaled the lack of demand into year-end from customers that were fully committed and had enough inventory to meet demand. Backing out the 13.531 cents/lb import duty, it was still below 2015 levels when there were extended LME warehousing queues. Market sources said replacement costs could still be pushing 37 cents/lb for duty-paid units.

"We are fully covered into year-end, with everyone watching inventories," a consumer said.

Short-term sentiment divided

The October/November settled at a 3.962 cents/lb backwardation Oct. 29, with the October monthly average finishing at 34.652 cents/lb. The November contract traded down to 30 cents/lb on the same day.

Inventories continued to be drawn as traders tried to restock depleting inventories, especially into Owensboro and the South as market sources had noted ample Toledo, Ohio, warehouse stocks.

Also noted by sources were continued high costs and long lead times to move metal from Midwest Terminal Toledo further inland.

Spot market activity has been quiet as traders look at tonnage offered by producers into year-end.

The November/December spread settled slightly tighter over the past two weeks as sentiment has been fixed but fundamentals are still in place longer-term, trading around a 1.50 cent/lb backwardation. Some rolling of positions continued as fresh small buying has come into the 2022 contracts as open interest rose. Some covering of short positions started on October 29, from December through Calendar 2022.

The Q1/Q2 22 spread loosened slightly on Nov. 1, bid at around a 0.75 cent/lb backwardation, as the Cal 2022 strip traded down to 26 cents/lb, a level not seen since July 21.

The 2022 contracts had more activity week on week, as some consumer hedging was met with large volume trader selling possibly to offset large purchases from producers, with an easing in ocean freight seen in the coming months supporting the backwardation into 2022.

Q1 2023 traded at 26.50 cents/lb — the second trade in the quarter — having last traded at 27 cents/lb on Oct. 7.

"The US is still the strongest market out there," a trader said

With the backwardations holding out farther, market participants can still actively sell the front-month contracts and buy forward-dated strips to capture some of the backwardations and restock inventories as seen with the larger volume trades that started Oct. 18.

• AUP total volume for the week ended Oct. 29 was 3,754 lots or 93,850 mt. Open interest finished the week at 23,952 lots, up 2,869 lots from the Oct. 15 close
• Spot/six-month spread settled at a 4.10 cents/lb backwardation on Oct. 29
• Cash-three-months spread settled at a $14/mt contango on the LME
• Dec 21/Dec 22 spread settled at a $60.25/mt backwardation on the LME
• Net speculative long positioning on the LME fell to 6.1% of OI as of the Oct. 28 close: Marex

The spot-to-six months premium spread held its backwardation over the previous week and averaged 5.185 cents/lb during that time.

The last Commitment of Traders report by the US Commodity Futures Trading Commission showed that as of the Oct. 26 close, long positioning by swap dealers increased by 975 lots during the week to 13,541 lots, with spread activity down 30 lots to 279 lots. The short positions by managed money increased by 18 lots to 1,004 lots while short positions by commercials increased by 2,121 lots to 22,108 lots.

The US and European Union came to a trade agreement on Oct. 30 to replace Section 232 tariffs on aluminum and steel imports with quotas and avoiding retaliatory tariffs by the EU on US goods. The agreement will require that the steel and aluminum shipped to the US be produced entirely in the EU to avoid transshipment from other countries.

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.

Even with Canada shifting much of its primary aluminum production to value-added products, the market continued to run short.

The Platts US spot 6063 billet upcharge reached a record high of 28 cents/lb on Aug. 12, but pulled back slightly to 25 cents/lb as of Sept. 30 and has remained there as 2022 contract negotiations start.