FOCUS: New tool to uncover arbitrage opportunities for aluminium

The United States will be fundamentally short of aluminium for the foreseeable future and must therefore import metal to meet its substantial demand.

Since units are widely available and cheaper in Asian warehouses, Metal Bulletin is launching a new tool that will allow the market to track the physical arbitrage between the two regions on a monthly basis.

Over the past year, there have been several occasions when traders have secured aluminium in Asia with the intention to ship and deliver the metal to the US Midwest to capture the arbitrage between the two markets.

Metal Bulletin assessed the US Midwest aluminium premium at 9.25-9.5 cents per lb on a delivered basis with 30-day payment terms on Tuesday December 5, up from 6.75-7.25 cents early in November 2016.

In Asia, London Metal Exchange aluminium warrants are available for between $5 and $15 per tonne fob. Non-LME cargoes are around $80-90 per tonne in Singapore and Malaysia and units are considered to be widely accessible.

Over 300,000 tonnes of available material are held in visible exchange stocks in Asian locations; many more are held in off-warrant storage facilities in similar ports.

In February and March, more than 600,000 tonnes of aluminium were canceled from Asian locations, a portion of which was shipped to the US where premiums had risen to their highest since May 2015 at 10-10.25 cents per lb.

With the premium having risen since July, cancellations are starting to increase. Since the start of October, more than 100,000 tonnes – many of the T-bar variety, the preferred shape of the US market – have been canceled from LME-registered warehouses in Asia. There is speculation that some of this material might have been bound for the US.

With this profitable trade flow in mind, Metal Bulletin is introducing today a new arbitrage calculator tool for aluminium from LME-bonded warehouses in Asia to the US Midwest.

The tool aims to provide a monthly indication of the differential between the all-in cost to deliver aluminium purchased via LME clearing from registered warehouses in Asia against the current US Midwest premium and the LME cash cost of the metal.

To do this, Metal Bulletin will use a monthly average of the US Midwest P1020A assessment and the average LME cash cost for that particular month to derive the all-in Midwest P1020A price.

This will be compared with the all-in cost and freight (cfr) price in Owensboro, in the US state of Kentucky, which is at the core of the US aluminium industry and represents a key reference price for the physical industry delivering into the Midwest.

The all-in cfr Owensboro price will be calculated based on analysis of all the latest trends in the freight industry provided by an external consultant, the official LME outright cash aluminium price and its published free-on-truck (fot) rates.

The all-in cfr Owensboro number will take into account the purchase of warrants from LME clearing in Asian warehouses, the cancellation of the material and break-bulk delivery of 10,000-tonne clips into the US port of New Orleans before being shipped via barge freight into Owensboro.

The cfr Owensboro price will then be compared with the all-in Midwest delivered price. It will not include the final delivery component from Owensboro to the customer or any storage charges due to the highly variable nature of these costs.

The arbitrage will then be published each month in a table accompanied by a short commentary on any changes in costs or in activity.

The first report has been published today. Thereafter, it will be published on a monthly basis on the first Wednesday of every calendar month.