ALUMINIUM Forward spreads force premiums lower in US, Europe

Spreads continued to drive aluminium premiums in Europe and the United States downward over the past week, while markets in Asia were quiet with participants there awaiting further developments on quarterly deals in Japan. US Midwest drops amid competition for limited spot business
The US Midwest aluminium premium dropped to 21.25-21.5 cents per lb on Tuesday June 26, according to American Metal Market’s latest assessment. This marks the lowest level since the premium was assessed at 18.75-19.25 cents per lb on March 27 and where it remained until April 9. US sanctions against Russian oligarch Oleg Deripaska and companies in which he holds an interest, including aluminium producer UC Rusal, were announced by the Department of the Treasury on April 6. This sent the premium to a more than three-year high of 22-23 cents per lb on April 10. According to market participants, spot business in the US is tepid, which is boosting competition among sellers looking to capitalize on any available consumer interest. The onset of the summer lull is said to be one reason that bids for spot material are limited. But if there is any motive for consumers to come to the spot market, it is the continuing backwardation on the London Metal Exchange. The three-month aluminium contract closed the official session at $2,143 per tonne (97.2 cents per lb) on Tuesday, while the cash contract closed at $2,152 per tonne. This put the backwardation at $9 per tonne, which is expected to continue into July-August. But a wider spread is said to be needed in order to push the premium down further. “I think the back[wardation] has to get a lot steeper in order to push the premium lower,” one trader said. “Are you giving up a penny now when it’ll cost you a penny in the future? It doesn’t make sense.”

Aluminium premiums in Europe continued to be pushed lower by a persistent backwardation in the LME’s July/August forward spread. The Rotterdam P1020 duty-paid premium stood at $155-165 per tonne on Tuesday, down from $160-175 per tonne a week earlier, according to Metal Bulletin’s latest assessment. The premium has fallen nearly 19% since the beginning of the month. Seasonal downturn as well as a recent tender said to have been concluded at slightly below the range, are driving bearish sentiment in the market. “Rotterdam is under pressure. It’s the typical seasonal effect,” one trader in Europe said. Some participants have started negotiating contracts for the fourth quarter, with offer and deals heard both above and below the range. A second trader in Europe said the higher fourth-quarter figures are pricing in costs of carrying metal, borrowing and the risk involved if the Rusal sanctions are left unresolved or come into full effect by the end of the year. “The market is thinking [the US sanctions on Rusal are] over. I believe [the sanctions will be lifted], but you cannot be sure, there is still a risk,” a second trader in Europe said. “Q4 is too far away, customers believe premiums can come down further,” the first trader said. On the duty-unpaid side, premiums held steady at $90-100 per tonne on Tuesday amid quiet market conditions, according to Metal Bulletin’s latest assessment. Some participants have tried to secure metal below the range but so far have not concluded any deals there. “I can’t see that you can buy below $90,” the first trader said. Elsewhere, the Italian duty-paid fca premium fell to $220-230 per tonne on Tuesday, down $15 per tonne from the previous week’s level of $235-245 per tonne. The market is less tight with more metal available and participants are expecting further deliveries to come. A seasonal slowdown is also affecting the Italian market. “The Italian market is slowing down now for the summer,” the first trader said. Meanwhile, the premium for aluminium in Spain on an fca duty-paid basis fell to $220-230 per tonne on Tuesday, down from $235-245 per tonne a week ago. No new business was reported this week with demand remaining weak. In Turkey, the duty-unpaid cif premium fell for the fourth week in a row to stand at $135-145 per tonne on Tuesday, compared with $145-155 per tonne in the prior week. The drop continues to reflect sustained declines in European premiums in recent weeks, but the Turkish market also remains quiet.  Aluminium premiums across Asia were stable this past week, with participants adopting a wait-and-see approach ahead of the settlement of third-quarter deals for aluminium supply to main Japanese ports (MJP). The spot cif MJP aluminium premium was unchanged week on week at $100-110 per tonne on Tuesday, with deals reported toward the bottom end the range due to high stock levels in Japan. Primary aluminium stocks at Japan’s three main ports of Yokohama, Nagoya and Osaka rebounded in the second quarter of 2018, after falling in the first, with inventories up 6.4% in May and nearly 9% in April. The wide backwardation on the LME’s July/August forward spread was also said to be pushing premiums lower. There have been more deals on MJP aluminium supply agreed at a premium of $132 per tonne between several buyers and more than one producers, sources involved in the quarterly negotiations said. The number, which could become the quarterly benchmark if more than 30,000 tonnes of business are confirmed at that level, represents a 2.3% increase from the second-quarter MJP premium, which had settled at $129 per tonne. Elsewhere, premiums in Southeast Asia were similarly stable this past week. The premium for aluminium in main Korean ports (MKP) on a cif duty-free basis was unchanged at $100-115 per tonne Tuesday, while the fca duty-free basis premium held at $115-125 per tonne. The premiums for aluminium in Singapore and Malaysia on a fob basis were both unchanged at $105-115 per tonne on Tuesday.  In Taiwan, the premium aluminium ingot on a cif basis remained at $95-115 per tonne on Tuesday.  In China, the premiums for Shanghai-bonded and cif aluminium were both unchanged at $95-105 per tonne on Tuesday due to a firmly closed import window. Losses on the Shanghai-London import arbitrage for aluminium stood at $514.51 per tonne on Tuesday, according to Metal Bulletin’s calculations. “The market [for aluminium] was quiet as there were no opportunities to [import metal] based on such large import losses,” a trader in Shanghai said.  “We don’t pay much attention to aluminium these days as no one wants to lose money on it,” a second trader in Shanghai said.  “Right now, we have stopped doing business on aluminium ingot due to its muted market performance,” a third trader in Beijing said. Meanwhile, high aluminium stock levels on the Shanghai Futures Exchange have also deterred participants’ desire to import any light metal into the country. Deliverable aluminium stocks at SHFE-approved warehouses fell by 1.7% or 16,009 tonnes last week to stand at 941,637 tonnes on Friday June 22.  “China has so much stock, although it has dipped a little these days, but compared with the total inventory, the decrease was nothing,” one analyst said. In addition, China’s 15% export tariff on aluminium products has significantly reduced demand from foreign customers, which might have helped eased the high level of aluminium stocks in China. “We see China’s tariff policy on primary aluminium ingot as a long-term one since China is trying to change [how the domestic industry operates],” a second analyst said.