Europe and U.S Aluminium premiums stable; Japan vulnerable due to supply glut

According to a Reuters report, physical aluminium premiums have stabilized in Europe and the United States mostly driven by tight market due to attractive financing deals and strong demand.  However, premiums in Japan are still vulnerable and may plunge further due to supply glut in Asia.

Aluminium premiums that is payable by consumers over the LME price has been declining in all three regions throughout 2016 and came down to almost one third. As more and more metal were released from the LME warehouses after the new regulations were implemented to cut queues to get delivery of metal, premiums started failing around the world.

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 aluminium 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 for the metal have to be high enough compared to the cash prices, in a strong contango, to make finance deals profitable. The current contango is of $14.25 per tonne, while the same was $7.75 in late-July and there was a backwardation of $3 in mid-April. The current situation is attractive for financial deals. Financial deals fail when there is a backwardation, i.e. cash prices are stronger than forward prices.

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Demand situation in the United States have been improving constantly mostly driven by higher automotive demand.  The LME's nearby Midwest premium contract was last trading at USD140.

In Japan, premiums have fallen to the lowest levels in last 7 years due supply glut. As Asia's biggest importer of aluminium Japan sets the premium benchmark for the East Asian region every quarter.

Spot premium levels in Japan are around $70/tonne as some buyers agreed to pay producers a premium of $75 per tonne for shipments in the October-December quarter, a 17 to 19 per cent drop from the previous quarter. Negotiations are still on from other buyers seeking premiums as low as $70 per tonne. There has been an oversupply of aluminium all over in Asia including Japan, South Korea, Malaysia, India, China and the Middle East, a Japanese trader added.

"We have reached rock bottom. I don’t think we can go any lower," another trader said, also citing the Middle East as a main supplier. Middle Eastern producers prefer shipping to Asia due to low freight charges and get ready to ship metal at a lower premium.