The unprecedented increase in aluminium premiums this week has reinforced the view of some in the market that London Metal Exchange prices are for the moment less reflective of fundamentals than premiums.

Metal Bulletin’s European duty-unpaid aluminium premium was trading in a record-high range of $245-265 per tonne on Tuesday January 14, from $220-250 previously and from $210-230 at the start of the year. European premiums are trailing those in the USA, where Midwest premiums reached a record 15-16.5 cents per lb at the end of last week. Sources said that figure has now reached more than 18 cents per lb.

But the LME aluminium market has remained flat since the start of the year, although strong demand, limited supply and high scrap prices would suggest grounds for higher prices.

Carmakers are reporting record sales in 2013 and will grow further in 2014. While many consumers have buying still to do for the first half after predicting lower premiums to come last year, aluminium producers have told Metal Bulletin that most of their first- and second-quarter capacity is already committed to customers, which require larger volumes than last year.

“We have a lot more metal committed than in previous years,” a producer said.

“A lot of people expected the premiums to fall over New Year, but it didn’t happen. Now if you need metal and there’s no scrap, what do you do? You bite the bullet, buy more primary and keep your operations going.”

But it has not been in the price that such fundamental strength is reflected. It is the premiums that have risen, leading market participants to question the relevance of the LME price to the physical market.

“People in the physical world ignore the LME and concentrate on premiums,” a trader said. “The worry is that the LME price is becoming irrelevant, and we are effectively returning to producer pricing. Premium volatility has taken over the price.”

When looked at as an ‘all-in’ aluminium price, the LME price plus the MB duty-unpaid premium mid-point comes to $2,026 per tonne, from $1,993 at the end of last week and $1,981 in the first week of January.

“[Looked at that way] the move on aluminium premiums doesn’t look so big,” the trader said. “But the LME is static, and has no relevance to the physical aluminium market. It’s all on the premium.”

Jethro Wookey
Twitter: @jethrowookey_mb