Japan’s Q4 premiums lower amid changing physical market

Japanese premiums for Western-brand aluminium for Q4 2007 delivery seem to be settling around the $65-66/t over LME cash level.

That compares with Q3 2007 premiums of $68-69. Indeed, quarterly premiums have now fallen for four consecutive quarters from the recent high of $82-83 seen in the fourth quarter of last year.

Weakness

On the surface, the slide in quarterly Japanese premiums is not too surprising. Local buyers have been complaining for some time about the country's lukewarm consumption.

At a macro level the Japanese economy has been performing well - although not quite as well as widely assumed judging by the recent downwards revision to the Q2 2007growth figures - but this has not been accompanied by a particularly robust performance at the micro level of the aluminium market.

Mill shipments - a rough proxy for local consumption - were up marginally year-on-year in July but only after four months of lower readings against the year-earlier period.

Spot premiums in Japan have traded consistently below the Q3 term levels, falling to $63 (on the bid side) at one stage in July.

Poor summer weather and the resultant hit on beer sales - a seasonal boost to the local packaging industry - have compounded a sense of negativity in the Japanese aluminium sector that has been evident almost since the start of this year.

Strength

So why, then, did some Australian producers come to these talks with opening offers of up to $75/t over LME cash?

In doing so they opened up a divide with producers from other regions who were offering at levels significantly below that at $67-68. The split caused a fair degree of early confusion in these latest talks before the Australians re-thought and came back with offers closer to the rest of the producer consensus.

This highly unusual divergence in producer offers, however, tells us more about the dynamics of the broader Asian market than the actual level of the Q4 premiums achieved in Japan.

In particular, Australian producers seem to have seen good spot demand and resulting stronger premiums elsewhere in the Asian region, but particularly in South Korea.

Spot premiums for delivery to South Korea have been recently talked up to $72-74 over LME, although it's only fair to point out that Japanese buyers have openly expressed some scepticism as to whether this level has been transacted.

Certainly, there has been an upwards bias in the recent tender results announced by the South Korean government stockpile manager, the PPS. The last one at the end of August went for $64, up from $60 (at the top end of the range) in mid-August.
Anecdotal reports out of the country suggest that off-market stocks - those not registered with the LME - have fallen to very low levels.

Change

The reason for that is the changing dynamic of the Chinese market. Even a couple of months ago, any quoted premium for Western-brand metal in South Korea was largely nominal. No-one wanted it. Everyone was using Chinese metal.

Chinese exports of aluminium have fallen off a cliff since the imposition of a 15% export duty at the start of this year. Those to South Korea - a favoured destination - fell by 80.5% to 57,574t over the first seven months of this year.

But exports of aluminium "product" - we use the word cautiously since much of it is first-stage converted metal - have soared. South Korea has been an eager buyer of such metal.

Now, however, the Chinese authorities trying and stem the flow of "product" via the removal of export tax rebates on a host of aluminium goods. The jury is still out on whether this will be enough to halt the trade but it is widely expected to slow it and Beijing's intent to tackle the issue is no longer in question.

That has caused South Korean buyers to start moving up the quality scale, mostly into non-Western brand aluminium. Premiums have increased. The most recent PPS tender was awarded in two clips, one at $49/t and one at $58/t.

The impact is rippling all the way up to the Western-brand part of the market. South Korean term premiums normally settle at parity with those in Japan, which has long been the benchmark setter for the Asian market-place. This time around, though, things may change as South Korean buyers wake up to the fact that their reliance on Chinese exports (in whatever form) may have a limited future.

Even more significant could be the recent newswire reports coming out of China that Chinese merchants are looking to step up imports of aluminium.

The drop in LME prices, the recent removal of a 5% duty on aluminium imports and continued strong demand have combined to make imports look increasingly attractive. At the moment, this is still a tentative development, but import demand from China would tighten up further an already tightening regional market. For now, though, Japan is not part of that phenomenon.