Japanese aluminium buyers ponder dropping annual contracts in favour of buying on spot market

<p>Aluminium buyers in Japan are transitioning away from annual contracts, turning instead to purchasing their aluminium on spot markets, according to a recent article by Reuters. Significant oversupply, largely from smelters from the People&rsquo;s Republic of China, has kept prices on the spot market at or near seven-year lows.<br /><br />In Asia the norm up to now for aluminium buyers has been to purchase aluminium by way of annual contracts, with premiums for metal delivered in each quarter determined by negotiations. These premiums become benchmarks for buyers across Asia.<br /><br />However, due to the continuing glut of aluminium cascading out of China, consumers that have already agreed to quarterly premiums find themselves buying at prices significantly above the current spot price.<br /><br />&ldquo;Lots of inventories are out there and we can get better deals if we buy them in spot,&rdquo; said a source at a fabricator who spoke on condition of anonymity. He went on to say that his company, which was also unnamed, would continue to cut back its buying via annual contracts in the coming year.<br /><br />&ldquo;We intend to ask smelters to change the way we do business,&rdquo; said a source at an unnamed Japanese trading house that suffered losses on aluminium inventories in their last fiscal year.<br /><br />However, switching from the annual contract paradigm to buying on the spot market has perils of its own. A source from one smelter warned that &ldquo;without annual deals, buyers may not get as much metal as they want at a time they want if supply gets tighter.&rdquo;<br /><br />There is hope on the horizon for both aluminium smelters and annual-contract buyers. Though not at the levels in early 2014 (which hovered around a quarter million metric tons), aluminium stocks at three of Japan&rsquo;s major ports dropped from half a million metric tons in May 2015 to 300,000 metric tons in July.</p>