As the calendar year comes to a close for the Japanese aluminium market, many will be looking to boost their exposure to floating premiums on their 2017 supply contracts after a year that has seen a larger than usual disparity between the fixed and spot markets for ingots.
While some are making the change to hedge against the CME's premium contract, others are seeking volatility in what is expected to be a heavily oversupplied physical market next year.
"People want to have more balanced premium portfolios. I don't think quarterly negotiations will go away but in the meantime we will see more floating business as well as the spot business as well," a trader told Metal Bulletin earlier this year.
Japan, which imports almost all of the 1.7 million tpy of aluminium it needs, contracts most of its aluminium volumes on a fixed-premium basis and also quarterly through the cif major Japanese port (MJP) benchmark.
But this year has been another where the fixed quarterly contract premium traded far above that of the spot market.
While spot rates in the first quarter averaged almost exactly $110 per tonne, which was the first-quarter benchmark, higher rates over rest of the year have caused frustration for many buyers.
Traders and consumers told Metal Bulletin they intend to increase their exposure to the spot market next year through floating contracts or via spot purchasing.
In the second quarter, the spot premium averaged $99 per tonne, which was 15% below the quarterly rate of $116-117, according to Metal Bulletin assessments at the time.
“The only thing I can say is: what’s the point of purchasing at MJP quarterly now? Producers need to change their strategy or they will lose their customers for next year for sure,” one trader told Metal Bulletin at the time.
In the final weeks of the second quarter, the average spot premium was some 27% below the quarterly benchmark. Just two weeks into the quarter, it was 6% lower.
The third quarter was similar. The MJP premium was set at $90-93, with the spot market trading as much as 23% below the fixed price by the closing weeks of the quarter. On average, the third-quarter spot premium was 18% below the quarterly premium.
“It's ridiculous - the spot market has been well below MJP all year. It’s frustrating," another trader said.
Spot rates in the fourth quarter have so far been slightly more reflective of expectations of higher premiums quarterly for next year - the differential in the fourth-quarter rate and spot rates has been a mere 5%.
Two offers for MJP aluminium supply in the first quarter have come in at $95 per tonne while buyers have submitted bids of up to $90, pointing to a likely increase of more than 20% in the quarterly benchmark premium.
South32 and Rio Tinto Alcan both offered $95 per tonne on a cif basis for MJP delivery, several sources told Metal Bulletin.
Rusal had initially offered $110 per tonne but is now widely expected to lower its figure in line with the other suppliers – it is the first time since the fourth quarter of 2014 that the Russian producer has offered its own premium to Japan rather than follow the benchmark once a settlement is reached.
Alcoa, meanwhile, has yet to put a number on the table because of supply problems at its Portland smelter in Australia, multiple sources said.
Still, many expect higher premiums for next year - producers in particular highlight the decline in MJP stocks, which stood at 239,900 tonnes at the end of November at Osaka, Yokohama and Nagoya, down 13.8% month-on-month and 40.2% year-on-year, Marubeni Corp data showed.
Japanese stocks have been steadily decreasing since reaching a record high of 502,200 tonnes in May 2015.
The drop in stocks signals tightening availability amid increased in demand in China and the USA, which has also led to an increase spot market premiums, market participants said.
Equally, many do not foresee any sizable increases in the premium in Japan amid increased competition. Many trading houses and producers are looking to take market share in this key market while there are huge stockpiles in nearly regions such as Korea.
But any sizable increases in the spot rate could burn those buyers who have chosen to risk getting a higher proportion of their supply on the spot market.