CME European aluminium premiums show expected uptrend in Q4, 2019

An uptick in trading activity for the CME Group’s European aluminium premium contracts during July indicates that market participants are eyeing a possible uptrend in aluminium premiums in Europe for the remainder of this year and into 2019.

Doubts about whether the US government will lift its sanctions against Russian aluminium producer UC Rusal, as well as a stable contango in London Metal Exchange forward price spreads, are both contributing factors to the renewed bullishness surrounding European aluminium premiums.

Participants looking to position themselves ahead of any change in the US Treasury Department's sanctions on Rusal helped drive volumes through the month of July, in which nearly 1,600 lots of the European Rotterdam duty-paid in-warehouse premium contract were traded. This compares with a sluggish 180 lots traded in June and the 480 lots traded in July 2017.

Metal Bulletin assessed the spot Rotterdam duty-paid premium at $150-165 per tonne on Tuesday, up from a LME backwardation-induced low of $140-160 per tonne on July 24. 

Yet the nearly 1,600 lots traded this July pales in comparison to August 2017’s 4,200 lots – the highest volume traded since the contract was launched in March 2016.

The CME Forwards are also pointing to an increase in European aluminium premiums for the remainder of this year and into 2019. As of Thursday August 2, quotes for the European duty-paid contract for the remainder of 2018 after October were at $195 per tonne, while for next year, quotes were at $200 per tonne.

The Rotterdam duty-unpaid premium forward contract is showing an expectation for increases in the coming months as well, indicating $105 per tonne for the rest of 2018 and $110 for 2019. Metal Bulletin assessed the spot Rotterdam duty-unpaid premium at $78-90 per tonne Thursday.

Meanwhile, the Rotterdam duty-unpaid premium contract, launched in September 2015, has remained largely quiet throughout summer, with only 710 lots traded in July. This was down from June’s 960 lots and roughly flat with July 2017’s volume.

Market participants looking to position themselves ahead of any change in the US Department of Treasury’s sanctions on Rusal were said to have helped drive CME volumes upward through the month of July. 

The US government said late last month that it was open to lifting the sanctions on the Russian aluminium producer, with US Treasury Secretary Steven Mnuchin stating “our objective is not to put Rusal out of business.”

In early April, the US Department of the Treasury implemented sanctions against a group of Russian government officials and oligarchs, and the companies that they control, for reasons including Russia’s involvement in the annexation of Ukraine’s Crimea peninsula and in the unrest in Syria, the department had said at the time.

Some participants expect a lifting of sanctions, should it materialize, to come before October 23, the deadline for investors to divest holdings in the sanctioned Russian companies En+, Gaz Group and Rusal. 

But with the divestment deadline being extended from August 5 to October 23 earlier this year, doubt has been cast on when sanctions will be lifted and if an immediate flood of Russian aluminium will enter the European market and force regional premiums lower.

“Does it really look that easy [for the sanctions to be lifted] if you look at the [downtrend of Rusal’s] share price over the last couple of days? There are some more concerns that it might take much longer [to lift the sanctions],” a trader told Metal Bulletin.

At HK$ 2.20 ($0.28) as of Friday, Rusal’s share price is down 11.6% since the beginning of this week and down roughly 52% since the sanctions were first announced on April 6.

Spreads supportive – for now
LME aluminium forward price spreads are now in a wide contango after the collapse of a prolonged backwardation lasting most of June and July.

The contango is driving further bullishness among traders for now. The LME’s benchmark cash/three-month aluminium spread was at a $25.25-per-tonne contango at Thursday's close, a stark contrast to the $50-per-tonne backwardation on July 16. 

“It looks like, if the contango remains, we’re going to see higher premiums in Q3 and Q4,” the trader said.

The stronger forward premiums are also driving concluded premiums upward. Participants told Metal Bulletin that fourth quarter 2018 deals have been concluded at between the top of the published range to around $25 per tonne above the range in recent weeks.

“You’ve seen the big deals on Q4,” a second trader said.

How long the spreads will support forward aluminium premiums in Europe, however, remains to be seen. Aluminium stocks on the LME totaled just 850,500 tonnes as of Thursday and the multiple cancelations of stock during the period of backwardation in spreads has left numerous traders apprehensive of a fresh backwardation in the near future. 

“That’s why people are concerned. There hasn’t been a certain amount of tonnage available. We will have periodic tightness going forward," a third trader in Europe said. 

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