Aluminum Physical Delivery Premiums Still Rising

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Usually, Japanese aluminum physical delivery premiums are set before the start of the quarter in which they apply but this year, the premiums have been delayed as buyers and sellers have struggled to find common ground.

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Buyers were said to have set their sights on $390-400/metric ton over the LME price, according to Reuters, but major producers had been pushing for $435-440/mt. Finally most have settled around $425/mt with the tight North American and European markets supporting the producers’ position. Although this is the fifth straight quarter of price increases, not all of it is going the producers’ way.

Inventory at Japanese ports Yokohama, Nagoya and Osaka increased by 9% in December from a month earlier to 413,000 mt, renewing a record high in November which was the highest level for data going back to April 2000, according to Reuters quoting the trading house Marubeni earlier this month. While demand has been quiet in Japan’s lackluster domestic market, activity is also said to be dampened by increasing exports of semi-finished products from China depriving Japanese and other regional producers of sales.

So far this has had less effect in US and European markets but the trend is rising and every ton a Western mill fails to sell in Asia to due to Chinese competition is a ton of sales lost, gradually raising Chinese semi-finished exports. This will impact western manufacturers more and more as time goes on.

Domestic ingots are costing Chinese semi-finished producers in the region of $2,050/mt compared to $2,350-2,375/mt for the US and in the region of $2,300/mt for European converters. A stronger dollar and very gradually declining RMB only adds to the pressure and allows Chinese producers to be increasingly competitive and explains the 19% increase in exports last year.

US Midwest premiums have started Q1 at record highs of $0.24/lb or $529/mt, but Reuters quotes analysts who are predicting a slight retrenchment to $470-475/mt by March, with premiums in Q2-Q4 gradually falling by some estimates to $420-485/MT as metal makes its way out of LME warehouses. and possibly appetite for the stock and finance trade wanes on a flatter LME forward curve and tighter credit supply.


What This Means for Metal Buyers

Although demand in North America has been boosted by strong automotive and aerospace uptake, the squeeze has as much to do with reduced supply as it does with smelters closing, up to late 2014 at least. The stock and finance trade has continued to soak up output. To what extent that game rolls on in 2015 will have a part to play in metal tightness this year and the level of those US Midwest premiums in the second half of 2015.

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