Surcharges for physical aluminum have stabilized in Europe and the United States as more attractive financing deals and firmer demand tighten the market, but those in Japan are vulnerable to sliding further due to a glut of supply.
In all three regions, the surcharges, or premiums, which consumers pay on top of the London Metal Exchange cash price for immediate delivery, have steadily declined for most of the year, falling by around a third.
A key driver of the decline has been more material released from LME warehouses after the exchange toughened regulations, forcing warehouses to cut queues to get delivery of metal.
European premiums were quoted in a wide range at $105-$135 a tonne for duty-paid metal in Rotterdam, with the upper end of the range up about $10 in recent weeks but still well down from $160-$185 at the start of the year.
LME aluminum spreads have made financing deals more lucrative, helping to siphon off some supply into warehouses, traders said.
"Making money is difficult in this environment, but now that the contango has returned, more people are looking to buy metal (for financing deals)," one trader said.
Forward prices have to be high enough versus nearby ones, in a strong contango, to make finance deals worthwhile, in which metal is sold forward at a profit and stored.
The current cash/threes spread is a contango of $14.25 per tonne, compared to a contango of $7.75 in late-July and a backwardation of $3 in mid-April.
Deals can fall apart when the market flips into backwardation - with nearby prices stronger than forward ones.
Surcharges in the United States have edged higher as demand improves, traders said.
The CME's nearby Midwest premium contract was last trading at 6.03 cents per lb, edging up from 5.99 cents a week ago, but far away from 8.65 cents at the start of the year.
"In America, they are using more and more aluminum for autos and for that they don't use recycled material as much," a trader said.
ASIA MIRED AT LOWS
In Japan, premiums have fallen to the lowest levels in more than seven years due to abundant supplies.
Japan is Asia's biggest importer of aluminum and the premiums for primary metal shipments it agrees to pay each quarter set the benchmark for the region.
Spot levels are around $70/tonne with some buyers having agreed to pay producers a premium of $75 per tonne for shipments in the October-December quarter, a 17 to 19 percent fall from the previous quarter.
Other buyers are still negotiating with global smelters for quarterly shipments, with many seeking premiums in the low $70 a tonne range. “I don’t feel that Japan aluminum premiums have hit the bottom yet, although they are not falling much either recently,” a trader in Japan said.
There was plenty of supply in Asia, not only in Japan but also in South Korea, Malaysia, India, China and the Middle East, he added.
A trader in Europe said Middle Eastern producers see Asia as an attractive destination due to low freight charges.
Elsewhere in Asia, premiums based on warrants in Singapore warehouses had slid to $5-$10 per tonne, down from $75 in January due to a glut of material, traders said.
"We have reached rock bottom. I don’t think we can go any lower," one said, also citing the Middle East as a main supplier. "It's been a feature of the market since June in particular."
(Additional reporting by Melanie Burton in Melbourne, editing by William Hardy)