February 3, 2023

Shifting automotive production away from traditional internal combustion engines and into electric vehicles will lead to more aluminum demand, according to aluminum producer Norsk Hydro. AEGIS notes that greater aluminum demand by US automotive industry could impact aluminum Midwest Premium (MWP) prices. To help offset the weight of battery packs, many auto manufacturers will produce lighter-weight aluminum components instead of steel. These aluminum parts include not only legacy components such as crash management systems but also EV-specific battery packs. According to consultant Ducker Carlisle, last year the average vehicle produced contained 299 lbs of cast aluminum and 56 lbs of aluminum extrusions. However, due to the increasing market share by EVs, the average vehicle will contain 304 lbs of cast aluminum and 89 lbs of aluminum extrusions. Moreover, EVs will compromise 31% of the North American light vehicle market, up from 6% last year, according to Ducker Carlisle’s projections.

There are three main reasons why rising EV demand could impact the MWP. First, greater demand for American aluminum products is generally bullish to prices. Secondly, domestic freight costs for moving aluminum products into the Midwest are included in the MWP, thus, greater freight demand could the MWP higher. Finally, the US imports approximately $150 billion worth of automotive parts each year, many of which are made from aluminum. As import tariffs are also included in the MWP, rising aluminum imports could also drive the MWP higher. (Source: S&P Global, Automotive Aftermarket Network)

However, end-users that are exposed to the MWP can mitigate this risk via CME MWP swaps. Please note that there is no options market for the CME MWP. The CME Midwest Premium swap market is thinly traded, so hedging in that market is tricky. Thus, we recommend using limit orders. Please contact AEGIS for specific strategies that fit your operations. (2/3/2022)

Note: Clients with AEGIS Platform access can see this and other research, plus hedge portfolio reporting and tools here. 

Price Indications

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