S. Korea aluminium premium drops, could help buyers in Japan benchmark talks

South Korea's state commodity buyer has paid a lower premium for aluminium in its latest tender, signalling a turning point for costs to obtain the metal in Asia as regional supply climbs.

The drop in premiums is likely to boost headwinds for aluminium producers, who receive the delivery surcharge on top of London Metal Exchange (LME) cash prices. It comes just as quarterly talks between producers and consumers kick off in Japan, which typically set the benchmark for the region.

Premiums have nearly doubled in the past two years outside China after Western producers cut supply due to years of low prices.

But they have been expected to come under pressure as China steps up exports of its surplus metal, a view this week echoed by top aluminium producer UC Rusal.

South Korea's public procurement service paid a premium of $355 per tonne for 1,000 tonnes of aluminium from Australia and $358 for the same amount from India in a tender that closed on Wednesday. The metal is for May shipment.

That is around 7-percent down from a premium of $383 per tonne for 3,000 tonnes from a tender awarded in late January for delivery in April.

The drop in premiums was echoed by opening bids from producers as Japan's quarterly talks began, at $415-$425 for the April-June quarter, flat to down 2 percent from the quarter before, according to sources.

A similar percentage fall to the one seen in the South Korean tender would push the Japan rate down to around $390.

"Premiums are definitely coming down, I agree, but the extent (seen in South Korea) is surprising," said a physical aluminium trader.

"For sure, someone is going to use that in Japan as an excuse to say: 'Hey look, we need lower premiums'."

But he added that Japanese premiums were unlikely to fall quite as much as those in South Korea as a steep drop could trigger further price erosion, with buyers unwilling to drastically cut the value of stock they already hold.

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