Asian aluminum premiums set to sag as China exports swell

Premiums for aluminum in Asia are set to slip from record highs as China ramps up exports of semi-manufactured products, leaving regional producers searching for buyers for their surplus metal.

Premiums, the surcharge for obtaining physical metal, have nearly doubled in the past two years outside of China after Western producers cut supply due to years of low prices.

A backlog at London Metal Exchange warehouses and financing demand from Western banks earning profit on stored metal also tightened supply.

But Japanese buyers and those elsewhere in the region, say premiums are not likely to extend from the current records.

China has been stepping up exports of its surplus metal, at the same time the LME overhauls its warehouse rules to release aluminum stores and banks back off from their financing plays due to an expected hike in U.S. interest rates.

"The aluminum producers in Asia who were exporting around South East Asia, they're facing stiff competition from the Chinese now, something they're not used to," said one trader in Singapore.

The Asian benchmark MJP (Major Japan Port) premium hit $425 for January-March deliveries agreed by global producers and Japanese buyers last month, up by two thirds in the past year.

Japan is Asia's top aluminum importer and the premiums for primary metal shipments it agrees to pay each quarter over the London Metal Exchange (LME) cash price set the benchmark for the region.

But a Japanese trader said most of the spot deals this quarter have been made below the MJP $425 level, reflecting higher inventories at main Japanese ports.

"We've received some inquiries by global producers that if we would be interested in taking extra supply, but we have not taken them as we think the premiums have hit the peak in Q1 and will head lower," the trader said.

A similar situation has been developing in other Asian importers due to the flood of Chinese supply.

"What’s happening with Indonesia, is that they have been importing a lot of this Chinese coil product," said a physical trader in Singapore. "But now, people say, look ... we’re done, we’re all stocked up."

China's exports of aluminum products grew about 19 percent last year, a trend expected to continue in 2015, given low local prices compared to international markets.

Japanese buyers and global producers are expected to begin second quarter talks as early as next week, with traders saying discussions are likely to start at lower levels for the MJP than seen in January-March.