US midwest aluminium premiums jumped to an all-time high this week, with market participant saying that the onset of contract talks, coupled with continued capacity concerns and elevated freight rates, compelled sellers to demand even higher upcharges for spot deals.

Metal Bulletin sister publication AMM’s assessment of spot P1020 premiums climbed to 21.25 to 21.5 cents per lb September 24 from 20.75 to 21 cents per lb previously.

The current aluminium market is "essentially a perfect storm" for premiums, one trader said.

"It’s mating season in terms of contracts and spreads are tightening," the trader said. "There are a lot of folks out there that are long inventory who are happy to start unwinding things for the right price. Fortunately for them, people really need the metal at this point."

High freight rates, which have been rising steadily over the past two years, were the primary driver of the "elevated premium environment," several market sources said.

"This is 100% a freight issue," a second trader said. "The rail cars are being used to transport oil, largely because some companies don’t have access to pipelines. Also, there are massive issues with trucks and it continues to get worse."

Average rates for normal trucking routes have nearly doubled in the past 18 to 24 months, the second trader said. "From Kentucky to Laredo (Texas) is about 5.4 cents per lb," he said. "That’s up from about 3 cents per lb two years ago."

The high freight rates have been exacerbated by a rash of bankruptcies in the trucking industry.

Smelter curtailments—largely due to low London Metal Exchange prices—are also compounding freight issues, a third trader said. "The curtailments continue to put a strain on the industry."

Most of this capacity is not expected to be restarted.

"Smelters are not restarting anything at these LME prices. This has caused a big problem because the auto industry is going gangbusters on aluminium and there is suddenly this huge demand," the third trader said.

The LME’s three-month aluminium contract closed the official session at $1,960.50 per tonne (88.9 cents per lb) September 25, down 1.2% from $1,985 per tonne (90 cents per lb) one week earlier.

The third trader said that he had seen smelters "switching units"—from low-margin to high-margin product—to meet demand.

"Smelters are moving these units to make high-margin products for automotive and aerospace," he said. "There is a limited amount of molten metal floating around, which will continue to put a strain on supply."

This report was first published by American Metal Market.