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The CME Group’s AUP Midwest aluminum premium futures held steady in the front part of the 2021 curve as the back part dipped slightly with some positions rolling from the fourth quarter into the first quarter of 2022.

As the labor and scrap markets remain tight along with rising freight costs, increased demand came in for P1020 and aluminum slabs from mills unable to obtain monthly scrap requirements.

The futures contracts trade on CME Globex and CME Clearport and settle on a monthly basis against the S&P Global Platts Midwest transaction premium.

“Freights [are] still going up,” a trader said.

Platts US Midwest premium hit a record high of 27.40 cents/lb on June 7, and has held there since, backing out the 12.264 cents/lb import duty as of June 11, the US Midwest premium is still below 2015 levels when there were extended LME warehousing queues. Market sources said replacement costs are now pushing 30 cents/lb.

The June contract settled up 0.15 cent/lb on the week at 27.25 cents/lb on June 14.

The June/July spread eased slightly to a 1.10 cents/lb backwardation, as inventories continued to draw on steady demand and traders tried to restock, especially into Toledo, New York and Baltimore.

“Large consumers are no longer getting discounts,” a second trader said.

“The West Coast is extremely tight and short on metal,” a third trader said.

With the backwardation holding further out, market participants are still actively selling the front-month contracts and buying further dated strips in 2021 to capture some of the backwardations and restock inventories.

Strong backwardation

The July/October spread moved in a stronger backwardation June 14, settling at 3.90 cents/lb. Some long positions have been rolled into second-half 2021 and Q1 2022 as fresh buying continued to come in across the curve. The Q3/Q4 spread tightened as well, settling at a 3.30 cents/lb backwardation, with Q3 trading from 24.80 cents/lb to 25 cents/lb, down slightly on the week and Q4 trading down to 21.90 cents/lb on the CME during the week ended June 14.

The Q4 strip gave up some of its recent gains, as positions rolled from Q4 to Q1 2022, with 960 lots trading in the spread from 2.35 cents/lb to 2.50 cents/lb backwardation. The spread was relatively unchanged on the week, as the market started to price in some relief in freight costs and increase in import flows
– Q1 2022 volumes were 480 lots during the week on CME Clearport.
– AUP total volume was 1,873 lots, or 46,825 mt, for the week ended June 11. Open interest finished the week at 23,294 lots, up 604 lots from the June 4 close
– The spot to six-months spread settled at a 5.50 cents/lb backwardation on June 14.
– Cash/three-month spread on the LME settled at a $15.75/mt backwardation
– Cash/December spread settled at a $13.50/mt backwardation
– Net speculative long positioning on the LME contracted to 18% of open interest as of June 10 close; Marex
The spot-to-six months premium spread held its backwardation over the previous week and averaged 5.168 cents/lb during that time.

The last Commitment of Traders report by the Commodity Futures Trading Commission showed that as of the June 8 close, long positioning by swap dealers fell by 942 lots during the week to 12,439 lots, as spread activity decreased by three lots to 942 lots. The short positions by managed money decreased by 344 lots to 798 lots.

The US Commerce Department has officially set a June 28 start date for the proposed Aluminum Import Monitoring and Analysis system and clarified certain licensing requirements for the program.

The US Census Bureau April trade data showed that imports from Canada reached 140,088 mt, up 36.9% month on month but still down 12.98% from April 2020.

The US Trade Representative has not given any further guidance on quota amounts for 2021, keeping the Canadian supply of P1020 in the US tight and increasing upcharges on higher-purity metal such as P0610 and P0506.

Even with Canada shifting much of its primary aluminum production to value-added products, the market continues to run short as the US spot 6063 billet premium hit 22 cents/lb on April 15 and has remained there since.

European steel prices are expected to strengthen further as steel shortages are likely to continue with the European Union’s proposed extension of safeguard quotas on steel imports into the EU, sources told S&P Global Platts June 14.

The EU notified the World Trade Organization June 10 that it is proposing to extend steel safeguard quotas for three years, with a 3% annual liberalization of quota levels. The current safeguards system, which has governed imports into the EU since 2018, is due to expire on June 30 after three years in operation. The EU has invited market reaction to the proposal by June 18.

Market participants showed mixed reaction June 14. While most sources expected safeguards to continue, exporters to the EU and buyers of imports were hoping for a 5% increase in quota levels to combat the current steel shortage that is gripping Europe.

European buyers expect shortage to continue

“I think it will be difficult for the economy, Western European mills are obviously not able to cover the demand in Europe,” said a German stockholder. “An increase of 3% makes absolutely no difference. Southern Europe will be most affected, they are very addicted to imports normally and if they’re blocked, especially in Italy – with the Ilva issue, it will be difficult for them to cover their full demand,” the source added.

Italy, a market that usually relies on imports, has been seeing a shortage in coils products especially as Acciaierie d’Italia, the ex-Ilva plant in Southern Italy, has not been producing at full capacity.

“The decision is surprising because we thought that due to the general situation in terms of raw material and increased domestic prices, we were expecting some opening on imports in order to balance the demand of steel which is very unbalanced,” said an Italian reroller source. “For sure steel buyers will not welcome this measure because definitely it’s difficult to understand in such an environment how we can keep imports under such discipline. Buyers will need to adjust their strategy.”

European hot-rolled prices have been plateauing with some downward tendency as of late, though prices are still at historical high levels. The daily Platts assessment for HRC stood at Eur1132.5/mt EXW Ruhr June 14, having surpassed its previous, June 2008, high of Eur800/mt in March this year.

The weekly Northwest European rebar assessment stood at Eur800/mt EXW Northwest Europe June 11, close to its all-time high at Eur815/mt during June and July 2008.

“This will bring more fire into the market – two weeks of pricing stability but confident with safeguard decision coming – market will react with more return of buyers and prices will increase,” the Italian source said.

Exporters to EU unsurprised

Veysel Yayan, general secretary of Turkish Steel Producers’ Association (TCUD), called the proposed extension of the safeguards “protectionist”, against free trade rules, and a demonstration of an inconsistent attitude on the part of the EU.

“While they are negotiating with US for the removal of the trade barriers, they are extending the barriers against us unfairly,” the general secretary said. Turkey’s steel industry, where production capacity is currently being expanded, is set to be one of the most impacted by an EU safeguards extension.

A Turkish agent said that Turkish exporters could still sell to alternative export markets in the US and Latin America, but that European buyers will feel the consequences of limited availability.

“European buyers will have a problem – HRC prices are very high and they have left the market to Arcelor,” said the agent.

Another Turkish trader said exports will continue “as usual” and that an expected European Commission anti-dumping investigation into hot dipped galv imports from Turkey and Russia to the EU would be troublesome for exporters.

Chilean state-owned Codelco bolstered its position as the world’s largest copper producer in 2020, as the company continues to implement a multibillion-dollar overhaul of its aging operations, according to S&P Global Market Intelligence’s Metals and Mining Research team.

The Metals and Mining Research team analysis of Codelco’s strategies is based on a detailed compilation of its activities over the 2011-20 period, part of MI’s Strategies for Copper Reserves Replacement study, which includes analysis of the world’s top 10 copper producers in 2020. These compilations show the relationship between each company’s production, reserves, costs, exploration budgets, acquisitions, divestitures and copper discoveries during the period.

Codelco’s copper reserves decreased significantly over the past decade, falling from a high of 63.6 million mt in 2012 to 49.1 million mt at the end of 2020, and reserves grades also have declined slowly but steadily. Resources, however, rose sharply from a low of 68.3 million mt in 2012 to 88.8 million mt in 2020, as five discoveries made during the 2006-20 period were added to the company’s resource inventory.

From 2011 to 2020, Codelco replaced 12.3 million mt of copper reserves, with the majority, or 74%, coming from exploration and development. With copper exploration budgets totaling $634.9 million, the cost of exploration-derived reserves was only $0.03/lb. Codelco’s exploration allocations over the past 10 years are relatively small compared with its production over the same period, as the company spent $0.016/lb of copper produced.

Taking advantage of its large land position in the most copper-prospective country in the world, Codelco is solely responsible for five major discoveries since 2008 — all of them in Chile. With copper exploration budgets totaling $916.7 million from 2006 to 2020, the exploration cost of the 18.4 million mt of attributable discovered copper was $0.02/lb.

March quarter

In the March quarter, Codelco recorded its highest quarterly profit in a decade, with profits of $1.63 billion on production of 386,000 mt of copper at a C1 cash cost of $1.32/lb.

The Ministro Hales, El Teniente, Chuquicamata, Salvador and Radomiro Tomic operations all recorded gains, offsetting a 40% decline at Gabriela Mistral. According to Chairman Juan Benavides, the company’s goal is to maintain annual production at around 1.7 million mt/year.

Codelco has been involved in an overhaul of its aging operations for the better part of the last decade. In 2012, it announced a five-year, $27 billion investment plan centered around five “structural” projects: the new Ministro Hales mine, the Chuquicamata underground project, a new mine level at El Teniente, a phase-two expansion at the Andina operation, and the Radomiro Tomic phase-two sulfide project.

Instead of developing several projects simultaneously, which has proven challenging given its fiscal constraints, Codelco opted to undertake the projects sequentially. The new Ministro Hales mine and $5.8 billion Chuquicamata underground project have been completed. At El Teniente, the world’s largest underground mine, Codelco is adding a new level that would supply 434,000 mt/year of copper for 50 years.

First production from the $5.7 billion project is scheduled for 2023. The new level is part of the larger Teniente Project Portfolio project, which comprises the Andes Norte Nuevo Nivel Mina, Diamante and Andesita projects. The overall project is about 62% complete.

At the Andina division, a $1.5 billion mine-plant transfer project is due for commissioning in 2021. The main goal of the project is to relocate the existing primary crushing plant to allow expansion of the open pit mine. The project is about 93% completed. The future development of a 150,000 mt/day treatment plant is under feasibility study.

At the Salvador division, Codelco is planning to begin construction of the $1.38 billion Rajo Inca project in the coming weeks. The project aims to overhaul the company’s aging Salvador mine, converting the open pit operation into an underground mine and adding 47 years to the mine’s life. Codelco hopes to increase production to 95,000 mt/year in the first half of 2023.

At the Radomiro Tomic division, a pre-feasibility study to expand processing to 100,000 mt/day to 200,000 mt/day is continuing.

Abroad

Looking abroad, Codelco is taking the government of Ecuador to international arbitration over the stalled Llurimagua copper project, located about 80 km (50 miles) northeast of Quito. The joint venture between Codelco and Ecuador’s National Mining Company, Enami EP, dates back to a cooperation agreement signed in 2008. The Chilean miner is asking Enami to fulfill its side of the agreement.

At the 2021 CRU World Copper Conference, Codelco Executive President Octavio Araneda Osés said the company aims to generate an additional $1 billion per year in profits through efficiency and productivity improvements to help finance $35 billion in further structural improvements over the next decade.

In December 2020, Codelco outlined sustainability plans in five areas of action for its operations and projects, including cutting carbon emissions by 70%, reducing water consumption by 60% and recycling 65% of industrial waste by 2030.

Centered around five key metrics, the plan aims to reduce three-quarters of Codelco’s carbon emissions by creating what it calls a “100% clean energy matrix.” The plan includes replacing underground production equipment with electric vehicles and machinery and involves a search for new clean-energy sources, such as green hydrogen.

G7 leaders committed June 13 to end new direct government support for unabated international thermal coal power generation by the end of 2021.

Leaders of the seven major industrialized nations – the UK, US, Canada, Japan, France, Germany and Italy – were meeting in Cornwall under the UK’s presidency of the group.

“We commit now to an end to new direct government support for unabated international thermal coal power generation by the end of 2021, including through Official Development Assistance, export finance, investment, and financial and trade promotion support,” the countries said in a joint communique.

To support developing countries move away from unabated coal, Canada, Germany, the UK, and the US have agreed to provide up to $2 billion to support the work of the Climate Investments Funds.

“These concessional resources are expected to mobilize up to $10 billion in co-financing, including from the private sector, to support renewable energy deployment in developing and emerging economies,” they said.

The leaders also launched a G7 Industrial Decarbonization Agenda to accelerate innovation, deploy decarbonization technology and harmonize standards in hard-to-abate sectors like iron and steel, cement, chemicals, and petrochemicals “in order to reach net zero emissions across the whole economy.”

For the first time, all G7 leaders have agreed to align their long-term and short-term climate goals with a limit on global warming to 1.5 degrees Celsius.

“We commit to net zero no later than 2050, halving our collective emissions over the two decades to 2030, increasing and improving climate finance to 2025; and to conserve or protect at least 30 percent of our land and oceans by 2030,” they said.

A “Build Back Better for the World” plan, meanwhile, would give developing countries improved, faster access to finance, G7 leaders committing to increase contributions and mobilize $100 billion a year via the International Monetary Fund.

Transport commitments were less defined, with the G7 committing merely to scale up zero emission buses, trains, shipping and aviation, and accelerate the phase-out of diesel and petrol cars.

“We recognize that this will require dramatically increasing the pace of the global decarbonization of the road transport sector throughout the 2020s, and beyond,” the countries said.

In domestic energy, the communique supported the Super-Efficient Equipment and Appliance Deployment initiative’s goal of doubling the efficiency of lighting, cooling, refrigeration and motor systems sold globally by 2030.

Before the global coronavirus pandemic, the US steel market tended to operate within its own bounds of normalcy. Price spreads between certain finished steel products and raw materials usually held some sort of rangebound level but not immune to a temporary macroeconomic catalyst skewing levels to the extremes. Even past markets where spreads became more pronounced, think tariffs in 2018, now pale in comparison to the current post-coronavirus US recovery.

In the US, where more than 70% of steel produced comes from electric-arc furnaces much of the focus on spreads between ferrous scrap and finished steel. In the case of sheet mills, No. 1 busheling compared to hot-rolled coil is the most important raw material to finished steel spread. It is a good proxy for mini-mills’ raw steelmaking margins, without accounting for labor, energy and others costs.

The year-to-date spread between the average of HRC and No. 1 busheling is at approximately $843/short ton, which is a 172% increase over the average going back to 2011. The current spread is more than 75% higher than when it ballooned in 2018. At the time of the previous record spread in 2018, a scrap market source described the pricing environment as the domestic mills having a frat party, while scrap dealers were having a picnic.

Scrap dealers are benefiting from higher scrap selling prices in the US compared to the 2018 cycle but are still unable to keep up with runaway finished steel prices for sheet products.

Within finished steel markets in the US price spreads are also out of whack with more historical levels, causing demand substitution. In the plate market, prices usually carry a premium to HRC. This is important as certain plate mills do not have dedicated plate melt shops and must divvy up semi-finished slabs with their sheet-mill counterparts. A premium price for plate products helps ensure more slabs are allocated. In addition, it gives other plate mills less incentive to sell lighter gauge plate in coils that can work for HRC applications.

The spread between the two products has always been volatile with the average Platts plate price for 2016 at just a $23/st premium to the HRC average for the year. However, in 2011 the premium was as high as $269 based on the two products annual price averages.

Despite the volatility, the very rarely violated rule of thumb that plate prices traded to a premium for HRC remained. Again, post-coronavirus recovery has completely bucked the trend with year-to-date average plate prices at a $160 discount to HRC prices.

Plate prices have continued to move higher but most market sources attribute it to the lack of availability given mills focusing on sales into the HRC market due to the significant premium.

One spread still holding some semblance of normalcy has been the cold-rolled coil premium to HRC. Year to date, the average US CRC price has traded at a premium of $180 compared to HRC. This is still in the higher-end of the historical range with the spread maxing out in 2016 and 2017 $192.

Still, many market participants considered the “normal” price spread between the two products at $100-$125. This is based of how the market traded before 2016. Since then the annual averages of the two products spread has been above $150, except for 2018.

It is yet to be seen if it will last, but the spread has been widening back since the beginning of June toward new highs, with levels exceeding $200 since June 4 and at $232 on June 10.

Most market sources aren’t ready to call these levels a new normal. In the same vein as the inflation talk in the US, these extreme spreads may just be transitionary. Supply chains should be able to normalize next year as more steelmaking capacity comes online and lead times retreat. In addition, raw material demand for scrap is set to increase with new EAF production in the US and potential Chinese demand. So as the market transitions from its post-coronavirus price surge it there may be more lasting changes to what is considered “normal” in the market.