Most deals for the delivery of Western-brand aluminium to Japanese buyers for the third quarter this year have settled at around $68-69 per tonne over LME cash. As always, there were a few deals done $1 either side of that range but the bulk of the business settled there.
It was the third straight quarterly fall in Japanese premiums from the recent peak of $82-83 negotiated for Q4 2006 deliveries.
Japanese buyers pointed to signs of slowing demand to justify the drop. Japanese mill shipments—a proxy for consumption—fell by 2.0% in April. That was the second month of decline after a long seven-month stretch of increases.
This time around Western producers were in no mood to argue—these talks were settled relatively quickly compared with previous negotiations on quarterly premiums.
Western producers were facing lower demand elsewhere in Asia and more acutely in the big North American market.
South Korea
Weak Korean demand was cited by Japanese buyers as a reason for their demands for a reduction in quarterly premiums in the third quarter.
In fact, South Korean demand for Western-brand metal seems to have fallen off something of a cliff. The spot premium for such metal is currently quoted at around $70 over LME cash, compared with Q2 term premiums of $71-73. But it is hardly being traded. Nor is Chinese ingot, which is quoted at around $40 over LME cash.
The country's buyers have been soaking up offers for aluminium of non-ingot form such as slab and billet from China. This is part of the recent phenomenon of super-high Chinese exports of "product" rather than primary metal as Chinese exporters have capitalised on the differential in tax treatment between the two—a 15% export tax on primary and tax rebates of 8-11% on "product".
The Chinese authorities have just moved to close this loophole, removing tax rebates on all exports of product other than the likes of strip and foil. There has already been an anticipatory reaction in South Korean premiums for such "product" but they are still trading at a hefty $30-40 discount to LME cash.
It remains to be seen how quickly exports of "product" to the likes of South Korea will fall in reaction to Beijing's move, which takes effect on July 1. But until supplies start drying up, Western-brand metal is decidedly out of favour in South Korea.
US
Nor could Western producers fall back on signs of strength in the North American market in the most recent quarterly talks with Japan.
The US market remains in the doldrums. The Midwest premium is currently quoted at 2.75-3.00 cents per pound over LME cash with the market characterised by an absence of spot demand.
Troubled end-use sectors such as housing and automotive continue to weigh heavily on consumption. Aluminium buyers seem to be more than covered on term contracts, leaving producers with the choice of either holding excess metal as inventory or offering aggressively in an already depressed local market.
Expectations that things would pick up in the second quarter—seasonally one of the strongest for aluminium—appear to have been dashed. The Midwest premium picked up only marginally to around 3.75 cents in March before resuming its medium-term downtrend. By point of comparison, the premium this time last year was around 5.75 cents per pound.
Nor does there seem much optimism around that premiums are going to recover any time soon. The best that can be said is that they currently barely cover the cost of freight/replacement and that they therefore have little further to fall.
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