Platts opens consultation on fallback mechanism for CIF Japan Aluminum Quarterly Premium assessment

S&P Global Platts has opened a consultation on a potential fallback mechanism for the CIF Japan Aluminum Quarterly Premium assessment (AAFGA00).

The assessment, expressed as a premium over London Metal Exchanges aluminum price, reflects the prevailing value for deliveries of aluminum on a CIF Japan basis within a specific calendar quarter under long-term contracts.

The premiums are renegotiated quarterly on a bilateral basis and are typically settled by the start of the quarter of delivery. In recent years, there has been a growing number of instances where contract negotiations have been under strain or broken down, causing difficulties for market participants requiring a benchmark for use in their contracts.

Specifically, in the second and third quarter of this year Platts has observed a significant reduction in a number of price settlements, as well as an extended delay in the completion of the negotiations in Q3.

Platts is exploring an introduction of the fallback measure in an effort to provide a more reliable and effective pricing mechanism for long-term contracts, which would be available even in the case of delayed or failed negotiations.

The fallback mechanism would be implemented in the event that insufficient settlements have been reached by the 15th day of the given delivery quarter. In such an instance, Platts would calculate and publish the quarterly premium (AAFGA00) as the average of the daily CIF Japan Spot Premium (MMANA00) assessments over the preceding 30 calendar days.

For example in the fourth quarter of 2020, if the quarterly talks had been delayed two weeks into the quarter, on Oct. 15 Platts would have calculated and published the quarterly premium at $87/mt. for comparison, the actual Q4 2020 contract negotiations settled at $88/mt.

Platts has analyzed historical quarterly premiums against the results of the fallback mechanism, and found an over 99% correlation in the past nine years. The average difference between the industry-negotiated contract price and the one calculated under the proposed formula was within $7/mt.

In the event that quarterly contract premiums are settled after the proposed fallback mechanism has taken effect, Platts will publish updated assessments at the time, provided the trades align to current Platts methodology and specifications.

This consultation does not affect the assessment of the Platts daily CIF Japan Spot Premium (MMANA00).

S&P Global Platts has been working with market participants on the CIF Japan Aluminum markets since its creation 20 years ago and has regularly engaged with market participants through meetings and forums to gather feedback.

Market participants are invited to send feedback on this proposal and any other aspects of the aluminum methodology to platts_mjp_moc@spglobal.com and pricegroup@spglobal.com by Jan. 29, 2021. For written comments, please provide a clear indication if comments are not intended for publication by Platts for public viewing. Platts will consider all comments received and will make comments not marked as confidential available upon request.