Japanese auto aluminum prices likely to be impacted by S Korean Hyundai probe

Prices of Japanese scrap aluminum and alloy products are likely to be impacted by South Korean prosecutors' investigation on Hyundai Motor and its aluminum alloy suppliers, market sources said Monday.

South Korean prosecutors are currently investigating aluminum procurement practices of Hyundai Motor Group, a company source told S&P Global Platts Monday.

The source at Hyundai Motor's Seoul office, who declined to be named, said investigations by Seoul Central District Prosecutors' Office are currently ongoing. He, however, declined to elaborate further.

South Korea's Yonhap News Agency reported last week that Hyundai Motor and six other companies supplying to the automaker face charges of holding pre-consultations on aluminum alloy prices before the automaker's buy tenders, over 2012 to 2016, for aluminum alloy sales worth Won 1.8 trillion ($1.6 billion).

Hyundai Motor and its suppliers could not be reached for official comment, while Japanese automakers are closed this week for the Golden Week holidays, with activities expected to pick up only after May 8.

POSSIBLE SCENARIOS

Two possible market scenarios could emerge due to this probe. Japanese traders said the investigation could slow export of Japanese scrap to South Korea.

The immediate impact may be limited, as in the last few months, Japanese scrap trade into South Korea has already started to slow down, traders said. South Korean smelters had turned to US twitch and Zorba scrap that were more economical, said one Japanese trader.

Japan exported 1,764 mt of scrap aluminum to South Korea in March 2017, compared to 2,953 mt in November 2016 -- the highest export month in the past six months, according to customs data.

Japan also exports 1,000-3,000 mt/month of 6063 aluminum extrusion and other scrap to South Korea, used by South Korean secondary aluminum alloy smelters for production of ADC, AC and other grades of aluminum alloys for automotive components.

Japanese scrap exporters may need to find new sales targets as exports to South Korea may decrease, if South Korean aluminum alloy prices decline following the investigation, Japanese traders said.

Japan was exporting scrap to South Korea rather than consuming at home, in times of higher South Korean scrap prices compared to those in the domestic market.

If Japanese scrap suppliers turn to domestic buyers, local scrap prices may fall, the traders added.

Japanese traders said unsorted 6063 extrusion scrap containing steel and other impurities, which comprise the majority of exports to South Korea, have been trading at Yen 160 ($1.43)/kg ex-warehouse, which is equivalent to $1.50/kg FOB South Korea including freight.

Japanese secondary aluminum alloy smelters consume 25,000-30,000 mt/month of 6063 extrusion scrap, according to Japan Aluminium Alloy Refiners Association data.

"The Japanese smelters may be receiving more offers as exporters need to cover the lost South Korean demand quickly," said a second Japanese trader.

"It depends on the investigation findings," the first Japanese trader said.

SECOND POSSIBLE IMPACT

Meanwhile, South Korean aluminum smelters, while importing Japanese scrap, export alloy products to Japan.

In March 2017, South Korea exported 3,572 mt of aluminum alloy to Japan, according to customs data. Japanese traders said most of South Korean exports to Japan were secondary aluminum alloys for automotive components.

The Japanese traders said import trades have not been affected by the investigations so far, and they were not aware of any changes in delivery schedules.

"If there is impact, and South Korean smelters cannot deliver, we will have to buy from China or Russia, which are geographically close to Japan. We are likely to switch to Chinese supplies that are more readily available. That may cause the Chinese export prices to go up," said the first trader.

Platts ADC12 prices were last assessed May 2 at $1,775-$1,800/mt FOB China. The freight rate from China to Japan is $20-$30/mt.

Hyundai Motor holds buy tenders twice a year, for molten aluminum alloy and aluminum ingot of ADC and AC grades for consumption at its Ulsan and Asan plants.

Tender participation is limited to local secondary aluminum smelters that have been certified by Hyundai Motor as an eligible supplier.

Hyundai Motor also buys customized and specialized aluminum alloys from overseas, said one South Korean supplier.