February 2022
Outside China, the benchmark global aluminium price is the London Metal Exchange’s (LME) Aluminium cash contract price, the price per ton for a 99.7% unalloyed aluminium ingot (or similar) for re-melting.

While most metal transactions are made directly between producers and customers, without going near the LME, through its licensed warehouses the exchange aims to provide a physical market of last resort and ensure the LME price is in line with physical/spot prices. Should the listed price rise above spot prices, traders can arbitrage the difference by buying metal on spot markets and selling on the LME and delivering to its warehouses, with the inverse occurring should LME prices drop below spot prices.

This is not the whole story, with the actual realised price aluminium producers receive and purchasers pay being higher than the benchmark LME. The difference between the realised price of aluminium and the LME cash contract is referred to as the ‘aluminium premium’. The size of the premium is affected by numerous factors, including supply/demand issues, LME spreads, warehouse queues/storage costs, perceived risk, raw material costs and financing.

 

 

Aluminium premiums are not simply fees for storage and transportation, they are meant to be reflective of the actual price to secure metal in a region. Ultimately, negotiations to establish realised prices, and therefore premiums, are conducted privately between producers, traders and end-users and are largely dependent on regional supply and demand. Reported aluminium premiums data marketed by pricing providers is based on ‘independent assessments’ of the regional prices.

There is a vast array of premiums across aluminium products reported by pricing data providers. The higher value of products beyond standard ingot, Value-Added-Products (VAPs) such as billet or alloys, are incorporated into the premium. The key aluminium premium prices most closely tracked are typically those of the large consumer regions, including:

- Ingot Delivered US Mid-West Premium;

- Ingot In-warehouse Rotterdam Premium;

- Extrusion Billet In-warehouse Rotterdam Premium; and,

- Ingot CIF Main Japanese Ports (MJP) Premium.

During the recent supply squeeze, record premiums have been seen in the US and Europe. This has been exacerbated by China’s surging demand and supply struggles, which have seen its imports rise and prompted a broad shift of available metal towards the Asian region. European premiums in excess of US$400/t represent six-year highs, and US Midwest premiums, which have reached over US$700/t, have not been matched for even longer.

 

 

Increased volatility of aluminium premiums since the GFC has seen the industry call for additional hedging tools to help mitigate risk exposures specific to premiums. As such, the LME provides four physically settled regional premium contracts for industry participants to manage their price exposure—US Premium, West Europe Premium, East Asia Premium and SE Asia Premium contracts. The exchange also offers three cash-settled contracts—Duty Paid European, Duty Paid US Midwest and Duty Unpaid European contracts.

The reported price series of aluminium premiums are typically used by buyers and sellers as a reference point for negotiations or a reference price within a contract, or they can be used for hedging through derivative products. Internally, managers may use published prices to assess sales team performance, while bankers and insurers may base valuations on relevant published premium series. While there is no requirement to use any specific published premium—with buyers and sellers privately negotiating on whatever basis they see fit—they have essentially become key reference within sales contracts.

 

Are Pricing Data Providers Just Making It Up?

All providers of aluminium premium pricing data are at pains to highlight they do not ‘set’ the premiums. Characterising themselves as a neutral third party or independent assessor with no financial stake in price movements, they report a nominal realised price in different regions each day. Arguably, though, they do have a financial stake, as if the premium effectively didn’t move, their premium price reporting product would have no value.

Aluminium premium price series have also been criticised for being derived from an opaque ‘price discovery’ methodology. With such a wide range of locations and quotation bases available, questions may rightly be asked as to the availability of accurate prices to base the reported values on, particularly for frequently published price series.

Providers indicate that data is collected from regular discussions with market participants—producers, traders and end-users—and is then verified and incorporated into a discretionary pricing model. The fact that clear procedures and a log of collected transaction or bid/offer data are kept for auditing purposes is highlighted, but the log is not made public, with accumulated data treated as confidential. That price assessors adhere to codes of conduct is also emphasised to generate a level of trust in the representativeness of the data.

However, it is uncertain what benefit a buyer or seller gains from disclosing the outcome of usually private and commercial-in-confidence negotiations to a third party. Published methodologies will usually also contain a statement on their data sourcing along the lines of ‘other relevant sources’ providing additional flexibility in deriving prices.

Pricing methodologies are generally aligned with International Organisation of Securities Commissions (IOSCO) principles in order to be certified by the organisation. While this adds a perceived level of credibility, it depends more on the passing of an audit for certification of a methodology than on actual adherence to best practice.

 

The APEX Act

Following an increase in realised US aluminium prices after the imposition of a 10% tariff on imported metal enacted in March 2018—followed by an effective doubling of the Midwest Premium—end users raised concerns of manipulation in reported aluminium premium prices. After the exemption of Canada—a major supplier of aluminium to the US—from the tariffs, the expected reduction in the Midwest Premium was not seen. This led to claims from downstream producers that they were, in effect, still being charged the tariff on imports from exempted materials.

On the back of these concerns around the opacity of premium pricing, along with lobbying by end-users—most notably trade associations from the US beer and beverage industry—the Aluminium Pricing Examination (APEX) Act was introduced into the US Congress and Senate. Aluminium end-user trade associations in the US believe the published aluminium premiums, specifically the US Midwest premium, are not representative of market fundamentals and have been harming downstream manufacturers and end users with high prices.

The APEX Act was put forward, at the behest of the downstream industry, to provide oversight authority to the US Commodity Futures Trading Commission (CFTC) for aluminium price benchmarking publishers. Additionally, it would give the Department of Justice the ability to consult with the CFTC to ensure all oversight and regulatory actions are in accordance with antitrust statutes. For its part, the CFTC is on the record saying it has consistently monitored published aluminium prices and has seen no evidence of price manipulation.

While the Act is supported by end users and their respective trade associations, it is opposed by the pricing data providers as well as producers and free-market think tanks—though some of these, curiously, have remained tight-lipped on the import tariffs—which argue it would result in unrestricted government authority over commodity pricing. Providers also argue that the data increases transparency of deals done behind closed doors.

After being re-introduced to both the US Congress and the Senate in mid-2019, it was not brought forward, suggesting it lacked the necessary broad support to pass. It was re-re-introduced to both houses of Congress in 2021 (the 117th Congress) and referred to the Committee on Agriculture, Nutrition and Forestry in the Senate and the subcommittee on Commodity Exchanges, Energy and Credit in the House.