(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, Oct 6 Japanese aluminium buyers will pay
a premium of $75 per tonne over the London Metal Exchange (LME)
cash price for their shipments in the fourth quarter of this
The settlement with producers, which will serve as the
benchmark for Asian physical aluminium markets, marks a near
20-percent decline from the previous quarterly premium of $90-93
per tonne and is the lowest level since the third quarter of
This is the continuing unwind of the premium bubble that
grew out of the load-out queues at LME warehouses in Detroit and
the Dutch port of Vlissingen.
Japanese users were paying $425 per tonne in the first
quarter of 2015, a period which marked the worst of the
fracturing of the aluminium price between LME paper and physical
We are now in the post-queue world and premiums are
returning to their previous function of delineating regional
supply and demand dynamics.
Quite evidently, there remains significant oversupply in the
aluminium market. Physical premiums everywhere else are also at
or near historical lows.
But the tail winds from the queues are still discernible,
determining where that oversupply appears.
Graphic on quarterly Japanese aluminium premiums:
Japanese buyers have successfully pushed through such a
significant drop in quarterly premiums by arguing that the spot
market is even weaker, recently trading as low as $70 per tonne.
There are multiple factors at work in suppressing the
Japanese premium right now.
Japanese stocks of aluminium have been trending lower but at
304,200 tonnes at the end of August are still high by historical
Local demand is running at subdued levels, output of rolled
products, for example, falling one percent from year-earlier
levels in July and August, according to the Japan Aluminium
Freight rates, a key component of physical market premiums,
are bombed out.
And both Japan and the wider Asian region are battling
against the continued export flow of semi-manufactured products
out of China.
Exports may be down around five percent year-on-year but
China is still pumping out around 350,000 tonnes per month of
products, most of it into other Asian countries, displacing
primary metal demand.
Interacting with these drivers is leakage of metal from
off-market financing deals, a trade predicated on the structure
of the LME forward curve.
A profitable financing trade needs a sufficiently wide
contango on the LME to cover the costs of storage.
As of the close of business Wednesday the
cash-to-three-months period CMAL0-3 was valued at $8.25
This time last month it was $19 per tonne and the spread has
since flirted with backwardation, a structure that makes it
unviable to hold metal, even in the cheapest storage options.
And rewind a year or so and that spread was consistently
trading as wide as $40, manna from heaven for aluminium
Moreover, "tom-next" CMALT-0, the price of rolling a
position one day forwards, is experiencing persistent tension.
The shortest-dated spread in the LME system flared out to $10
backwardation at times in September and even this morning traded
briefly into small backwardation.
The trend is towards tighter LME spreads and when the curve
undergoes one of its ever more frequent contractions, finance
deals aren't renewed, releasing more metal into both physical
and LME markets.
The tail winds from the load-out queues are both acting to
tighten those spreads and determine where metal appears back in
the LME system.
Graphic on LME stocks by region:
OUTS AND INS
There is still a load-out queue at Vlissingen sheds operated
by Access World, the logistics arm of Glencore.
Its direct impact on physical premiums has been broken by
the LME's concerted attack on the queue model, a mixture of
enforced faster load-out rates and rent relief for those
awaiting their delivery slot.
Vlissingen has been for many months the driver of falling
headline LME stocks and the accompanying decline in free-float
aluminium in the system, the stuff that can be used for physical
settlement of positions.
The lower the level of free-float stocks, the greater the
potential for spread contractions, particularly in aluminium
where the LME's futures banding report shows super-large
positions liberally distributed across the next three main
prompt dates. <0#LME-FBR>
Every time the spreads contract, there is a reaction in
terms of metal being warranted into the LME system.
But this is where the queues also cast a long shadow.
While the Vlissingen queue ruled supreme, metal coming out
of finance deals gravitated towards the Dutch port.
But the queue model is no longer profitable and warehouse
operators such as Access are wary of taking in more metal for
fear of the potential penalties of renewed queue building.
So what has spilled into LME sheds from no-longer-profitable
finance deals has washed up elsewhere, particularly in Asia,
where it acts to undermine local premiums.
Headline LME stocks have fallen by 755,000 tonnes this year,
largely reflecting the 708,475 tonnes outflow from Vlissingen.
Stocks at LME sheds in the U.S. have also fallen to the tune
of 168,075 tonnes through the end of September with Metro, the
"owner" of the original load-out queue in Detroit, effectively
out of the aluminium game.
But those in Asia have risen by 250,700 tonnes with inflows
largely concentrated on Singapore and South Korea.
There are no queues in Asia and warehouse operators have
even been offering incentives for deliveries.
In many ways the latest lurch lower in the Japanese
aluminium premium represents a normalisation of the market after
the trials and tribulations of the queue years.
Premiums in Japan and everywhere else are returning to
Regional differences are more discernible. The benchmark
Asian premium is reflecting particular oversupply in the market
which is closest to China, which is to be expected.
But adding to such natural downwards pressure is the
adjustment of the market to the LME's post-queue reality, one of
diminishing stocks, tightening spreads and the release of more
financed metal, particularly into LME warehouses in South Korea
The great premium unwind, in other words, may not be over
(Editing by William Hardy)