Plunging prices challenge market's appetite for Asia's aluminum benchmark

Singapore — Asia's aluminum market is currently seeing a shift in trading trends as prices plummeted this week to a near four-year low.

In particular, there have been significant changes in the quarterly contract premium negotiations for primary aluminum delivered to Japan, which is a recognized benchmark for trades in Asia, along with spot contract premiums for P1020 metal delivered to main Japanese ports, also commonly referred to as MJP premiums.

Historically, four Western producers — Alcoa, Rio Tinto, South32 and Rusal — and 15-20 Japanese buyers have been involved in the quarterly price adjustment talks for these annually-agreed long-term supply agreements.

Market talk was rife among traders that Alcoa would skip the round of negotiations early this week and, indeed, a source at Alcoa told Platts this week that it had not concluded any Q2 term contracts which aligned with Platts' methodology for the quarterly assessment.

"The Q2 premium levels negotiated and reported thus far [at $82/mt] do not meet our expectations,” the Alcoa source said.

Alcoa's allocated volumes for Q2 to Japan, meanwhile, will likely be sold on the spot market in Japan and across Asia, according to the company.

One of Alcoa's customers said both parties had agreed to go ahead with April cargoes at least, at a premium of $82/mt, with no further detail provided.

Meanwhile, somewhat muddying the waters, Japanese buyers insisted on $75/mt or lower bids, and two major end-users had to purchase and conclude six Q2 strips for multi-cargo supply with international traders for loading over April-June at $82/mt, against a $90/mt offer.

There was talk about whether the price of such supply contracts could play a role in setting quarterly benchmarks. Traders simply stepped in as end-users approached them for supply at acceptable levels, one seller said.

While the quarterly benchmark system continued to show signs of breaking down, market participants have in recent years increasingly referenced Platts spot MJP assessment in their contracts.

Spot activity picked up as Platts observed 97 spot deals, totaling 50,500 mt in 2019, compared with 15 deals for 23,300 mt in 2016.

The latest Platts Japanese imported primary aluminum premium for the second quarter was assessed at $82/mt plus LME cash, CIF Japan, on Wednesday, down from Q1's $83/mt to a 3.5-year low. The decline came with aluminum's plummet from March 13, setting new four-year lows every day.

The LME cash settlement hit $1,448.50/mt on Thursday, down 20% from the 2020 high at $1,810.5/mt on January 21.

In 2019, quarterly premiums to Japan moved within a narrow range of $83-$108/mt, with LME cash hovering around $1,800/mt. But that was due to the market correcting itself after supply disruptions from sanctions and alumina shortages in 2018 led to volatility in price and premiums that year.

No demand

Japan imported 1.42 million mt in 2019, down 11%, which was reckoned as a siren of a slowing economy as the country had been importing of 1.5 million-1.6 million mt/year steadily for decades.

No demand has been the most mentioned phrase from Japanese end-users recently. Japanese trading houses stood on the sidelines, being more risk-averse while stocks were piling up at Yokohama, Nagoya and Osaka.

Nonetheless, the fast-spreading coronavirus pandemic added more weight on demand.

On the supply side, major smelters kept production going as costs fell on lower energy and feedstock prices, despite a few smelters' temporarily cutting because of the pandemic, which was seen as irrelevant to Asian markets by sources.

If COVID-19 cannot be contained in the second quarter, they might consider switching value added products (VAP) lines to P1020, possibly adding to the supply glut, several producers said.

Market participants, except producers, urged effective production curtailment to help. "If prices continue to remain stagnant and proceed downwards, I believe closures will not be temporary,” a Japanese trader said.