In brief
- The physical premium is the surcharge, in dollars per tonne, paid above the LME price to obtain metal in a given form, place and time.
- It covers real costs — transport from the warehouse, duties, financing, handling, insurance — and the availability of metal on that regional market: when metal is scarce the premium rises even if the LME falls.
- The most followed benchmarks are the Rotterdam aluminium premium (duty paid and duty unpaid), the US Midwest, the Japanese MJP, the copper cathode premiums in Europe, and those for zinc, nickel and lead.
- In supply contracts the price is "LME + premium": the exchange gives the market component, the premium the regional one. The two parts are negotiated separately and move for different reasons.
- From 2026 the CBAM adds a cost on primary metal imported into Europe: one more factor to read in European premiums.
What physical premiums are
The LME quotation refers to a standard contract: metal of quality and form registered by the exchange — 99.7% primary ingot for aluminium, Grade A cathode for copper — delivered into any approved warehouse in the world. It is a world reference price, not a purchase price. Anyone buying metal to process it wants it in a specific form (billets, slabs, wire rod, alloyed ingots) and delivered to their own plant in a given month.
The premium is what separates the two prices. It is expressed in dollars per tonne (in the United States in cents per pound) and is added to the exchange quotation: the result is the "all-in" price of physical metal. In simple terms, the LME is the base price of the car; the premium is the options, delivery and registration.
What a premium covers
Inside a premium there are cost components and market components. The costs are measurable: transport from the LME warehouse to the plant, customs duties where the metal is imported (which is why Rotterdam has a duty-paid and a duty-unpaid premium), financing of the metal over the time between purchase and delivery, handling, insurance, and any transformation into a form other than ingot.
The market component is availability: how much metal there is, in that form and in that region, relative to demand. This is where the premium becomes an indicator in its own right: when European smelters cut output, when warehouse queues lengthen withdrawal times, when a duty closes an import flow, the premium rises even with a flat or falling LME. That is why the premium is read as a thermometer of the regional market, distinct from the exchange price.
The reference premiums, metal by metal
Every metal and every region has its own benchmarks, assessed by price reporting agencies and negotiated between producers, traders and consumers.
Why premiums move
Premiums have a history of their own, often different from that of the LME. In 2013-2014 the Rotterdam aluminium premium reached record highs while the exchange was weak: warehouse withdrawal queues and financing deals kept metal out of the physical market. In 2021-2022 European duty-paid premiums rose to record levels again, driven by the energy cost that stopped European smelters and by strained logistics. In 2018 US tariffs on aluminium pushed the Midwest premium up with no symmetrical effect on the LME.
Five factors to follow: sea freight and logistics, duties and trade measures, the cost of financing (interest rates), the state of regional smelters (closures and restarts, often linked to energy prices) and trade flows, Chinese imports in particular. In Europe, from 2026, the CBAM is added: the obligation to cover the emissions embedded in imported primary metal is a cost the market tends to reflect in the premiums of metal of non-EU origin.
The all-in price: an example
The price a European company pays for physical metal is built in three steps. First, the exchange component: the LME price of the reference period set by the contract — the Official cash or three-month price of a day, or the monthly average. Second, the negotiated premium, in dollars per tonne, depending on form, place and period. Third, the conversion into euro at the exchange rate set by the contract.
An example with illustrative numbers: LME aluminium cash 2,500 dollars per tonne, Rotterdam duty-paid premium 300 dollars, total 2,800 dollars per tonne; at a euro-dollar rate of 1.10 the price in euro is 2,545 euro per tonne. If the premium rises to 400 dollars with a flat LME, the price becomes 2,900 dollars, i.e. 2,636 euro: a 3.6% increase the exchange quotation does not show. That is why metal buyers follow LME, premium and exchange rate as three distinct series.
How they are used in contracts
In supply contracts the typical formula is "LME + premium". The LME part is tied to a published, verifiable exchange price: the Official cash of a day, the monthly average (the LME MASP) or the average of the agreed quotational period (QP). The premium is negotiated separately, usually for a quarter, a half-year or a year, and stays fixed for that period: it is the component the buyer really negotiates with the supplier.
Three clauses deserve care: the reference period of the LME price, the exchange rate to apply for conversion into euro (the euro-dollar guide explains the alternatives) and the form of the metal, because the premiums of billets, slabs and wire rod differ from those of ingot. A contract that only cites "the LME price" leaves the most negotiable part of the cost undefined.
Premiums on FT Mercati
FT Mercati publishes premiums on LME metals alongside exchange quotations, with the history that allows reading the premium cycle and comparing supplier offers with the market. The Milan Indexes, which continue the historical Milan market quotations, incorporate the Italian market premiums in the euro price of metals and alloys: they are the contractual reference for those buying in Italy.
On the platform the three components of the physical price — LME, premiums and exchange rate — sit on the same screen, with charts, averages and price alerts. The LME premiums page of the site gives an overview of the service.
Frequently asked questions
What is the LME premium?
It is the surcharge, expressed in dollars per tonne, paid above the LME quotation to obtain physical metal in a given form, place and period. It covers logistics, duties, financing and handling, plus the availability component of the regional market.
Why does the premium rise when the LME price falls?
Because they measure different things. The LME reflects the world balance between demand, supply and exchange stocks; the premium reflects the availability of metal in a region and in a form. Smelter closures, warehouse queues, duties or rising freight push the premium up even with a weak exchange.
What is the difference between duty-paid and duty-unpaid premium?
The duty-paid premium refers to metal already cleared through customs, in free circulation in the EU; duty unpaid to metal under customs bond, for which the duty is still to be paid. The difference between the two reflects the incidence of the duty and the formalities.
Is the premium the same for all metal forms?
No. Premiums refer to the form: primary ingot has the base premium, while billets, slabs and wire rod — semi-finished products ready for processing — carry higher premiums that incorporate the transformation. Contracts should always state the form.
How is the all-in price built?
LME price of the reference period plus the negotiated premium, in dollars per tonne; the total is converted into euro at the exchange rate set by the contract. The three components should be followed separately, because they move for different reasons.
Does the CBAM affect premiums?
From 2026 the CBAM requires covering the emissions embedded in primary metal imported into the EU, with certificates purchasable from 2027. It is an additional cost on non-EU metal that the market tends to reflect in European premiums: a factor to follow, whose rules and deadlines the CBAM guide explains.
Sources
References for this guide:
- LME — reference prices
- LME — warehousing and physical delivery
- FT Mercati — LME premiums
- European Commission — CBAM
This guide is for market information purposes and does not constitute financial or commercial advice: purchasing and hedging decisions should be taken with your own advisers. The numbers in the examples are illustrative and do not represent current quotations.