Can the price of aluminum be secured (hedged) for a purchase/delivery in the future?

A big advantage of aluminum over other materials is that it’s very easy to secure a price for any transaction in the future. An example would be a large amount of aluminum that’s ordered today and will be used for a bridge but only delivered a year or so after. The global base price of aluminum can be hedged at the London Metal Exchange (LME). In fact the most traded price is the so-called 3M price (i.e., for delivery in three months from now), which comes from a time when a ship would take three months to bring tin from Malaysia or Copper from Chile. Aluminum can be traded at the LME as far out as 63 months (i.e., five years and three months). As metal is required for example in North America, and there is a “regional premium” over the LME price (the so-called U.S. Midwest Premium) that isn’t traded in London, this local premium can be traded (and therefore hedged) at the Chicago Mercantile Exchange (CME). With this the full price of primary aluminum can be hedged and secured for transactions/deliveries in the future, so that large projects are not exposed to metal price fluctuation risks.

Is primary aluminum cheaper in Quebec because there is so much produced in the province?

Primary aluminum has one global base price, which is determined at the London Metal Exchange (LME). No primary aluminum producer would sell below this price, as they could simply sell their metal at that price directly on the exchange. The metal bought at the LME can be at any producer’s location (in other words, the location is at the seller’s discretion). This means that a consumer would need to bring it to wherever
it is needed. 

To avoid this, however, there is a second factor concerning the primary aluminum price, which is a regional market premium that exists in every major consumer region. In Japan it is called “CIF Japan,” whereas in Europe it is “GW premium paid in-warehouse Rotterdam.” In North America it is the “Midwest U.S. Transaction Premium” (MWP). This LME price plus the MWP together form the “Midwest U.S. Transaction Price,” which is the price for primary aluminum delivered and duty paid in the Midwest region. Consumers outside the Midwest can get a small discount or premium if they’re close to a producer, but the discount is usually very small. All Quebec-based aluminum producers can sell in the U.S. basically duty free and will not sell their metal much cheaper in Quebec.

What determines the price of aluminum?

The global price of primary aluminum is determined at the London Metal Exchange (LME). Many factors influence the price, like:

  • Global supply and demand for the metal
  • Economics of aluminum production, especially the price of energy
  • Inventories: The higher the inventories, the greater the downward pressure on the price, and vice versa
  • Regulatory changes: An embargo, like the U.S. placed on Russian metal, changes the market dynamics and impacts the price
  • Exchange rates: Aluminum is traded even at the LME in U.S. dollars, but most of the production and demand are outside of the U.S.
  • Investors buying metal when the current price is low, expecting the price to go up in the future

There is also a regional market premium on the LME price. In North America it is called the “Midwest U.S. Transaction Premium” (MWP). It depends on basically the same factors, but on a regional level. Regional deficits like we have in North America require a high premium to attract offshore metal. A duty in one country or region is a regulatory change that directly impacts this regional premium, as is the case for the MWP. Together the global LME price and the regional premium form the “all in” price of primary aluminum.

Why is aluminum more expensive than steel?

Primary aluminum production is extremely energy intensive, which is the main factor responsible for the high cost. Between one third and one half of the cost of making aluminum is the direct and indirect energy needed to produce it.  

After that, most of the cost is attributable to the alloy ingredients, which are usually cheaper for most aluminum alloys than for many types of steel. The main ingredients of aluminum alloys are silicon (Si) and magnesium (Mg), while main alloy ingredients for steels are often very highly priced elements like nickel (Ni) and cobalt (Co). For this reason we need to clearly distinguish which type of steel we’re comparing with aluminum. The most common mild steels and carbon steels are usually less expensive than aluminum (on a per kg or per ton basis). It’s very important to take all factors into account, including the transformation process, tooling and assembly costs, as well as lifetime costs (e.g., maintenance). For example, if we compare stainless steel and aluminum and consider aluminum’s corrosion resistance, then steel tends to be more expensive. 

How much does aluminum cost, and how does it compare to steel?

Both aluminum and steel are commodities. Their prices are determined by many factors, but mainly by supply and demand. Although there are some similarities, their markets are very different, which has a big impact on their prices. As a rule of thumb, aluminum costs about three times more than steel. So if a pound of steel is around 0.30 USD/lb, aluminum will be around 0.90 USD/lb. At the same time, aluminum represents only one third of the weight of steel. 

There are also big differences in pricing depending on the specific type and alloy. Generally, the price differences between different steel types are much greater than those of different aluminum alloys. This is due to the alloy ingredients—for aluminum, lower priced metals like silicon and magnesium are used, but for steel, more expensive elements with volatile prices are used, like nickel and cobalt. 

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