By: Sameer Chakravarthy --
12 October, 2014
The premiums are nothing but the charges quoted over the LME cash price for a physical delivery of material. Premiums are mainly driven by market supply demand dynamics. Premiums tend to increase during supply tightness and vice versa. Premiums are of different types LME published and spot premiums. Premiums are settled in two forms one is spot and the other one is contract. In the recent past, U.S Midwest premiums (LME Physical delivery price = LME cash settlement price + Premium + Surcharge (for immediate delivery)) sky rocketed to all-time highs leading to the sharp increase in the overall purchase cost of the consumers. The increase in the U.S Midwest spot premiums fell on the contract premium negotiations, the quarterly premiums are reportedly jumped by 25-30% . Sharp jump in the premiums started to hurt the overall procurement budgets of the companies. The main focus of our paper is to find the reasons behind the sharp surge in the premiums. (Monthly Average U.S Midwest premiums are considered for the analysis).
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