FOCUS: MJP Q2 premium under pressure from Covid-19 concerns, market says

The global novel coronavirus (2019-nCoV) outbreak is putting bearish pressure on negotiations for the second-quarter MJP aluminium premium, according to market participants who told Fastmarkets they expect the premium to fall year on year.

The second-quarter premium in 2019 settled at $105 per tonne, but new offers heard today had been at $90 per tonne.

Earlier offers in the week were at $105 per tonne.

“It is extremely hard to justify a premium increase now frankly, with consumption being so low now, and demand is so, so little,” a Singapore-based trader said.

Market outlook has already been bearish for this year due to poor demand, but the coronavirus health emergency has further exacerbated the market situation, market participants said.

The number of coronavirus infections in Japan is about 207, according to statistics released daily by the World Health Organization.

Japan has also reported four deaths from the Covid-19, the disease that this strain of the coronavirus causes.

“The coronavirus is the main concern now because there are more and more patients,” a Japan-based trader said.

“Also, negotiations are starting this week and the producers who visit Japan for negotiations might be delayed which could push back the discussions,” he added.

The first-quarter 2020 premium settled at $83 per tonne, 14.4% lower than the previous quarter. In normal market conditions, demand in the first quarter in Japan is usually slow and the premium typically settles lower. Historically, demand recovers in the second quarter when consumers look to replenish their inventories for the start of the new Japanese financial year.

But aluminium market participants say they are expecting a lower-than-usual second-quarter premium this year, primarily due to the coronavirus outbreak.

“The market usually hits a good peak in the second quarter and everyone expected it would jump after the lackluster first quarter of this year, but now the virus has thrown [expectations],” a European based trader said.

“From a procurement perspective, end users especially are driven by the uncertainty of demand now and they want to be more prudent in purchasing,” a second Singapore-based trader said.

“I hear that end users ended up with higher stocks than they had planned last year so there is no need to purchase in bulk volumes as in previous years,” he added.

Spot premium stagnant
Market participants also noted a significant drop in spot demand, which was likely to spill over into how much quarterly volume is booked.

The proof is in the spot premium. The aluminium P1020A (MJP) spot premium, cif Japan has remained at $75-85 per tonne for almost two months. Fastmarkets most recently published the premium on Tuesday February 25.

“The spot premium isn’t going to move because everyone is gearing up for the quarterly premium in Q2 and they would rather take a wait-and-see approach on how the negotiations progress,” the first Singapore-based trader said.

“Usually we see some restocking demand from early February but this time round, the market is really quiet, which shows that either demand is too weak or there is too much inventory,” the trader added.

Sources also said that end users could be under pressure to meet balance sheet demands, due to the financial year-end being at the end of March.

Domestic tenders were also heard concluding within the $85-95 per tonne range on a cif equivalent basis, which is lower than this time last year when tenders were concluding above $100 per tonne.

Demand faces double hit
Weak demand from the automotive and construction sectors in Japan is also putting pressure on the country’s economy.

“Japan’s aging demographic and young couples not buying property has affected construction and with automobile consumption falling globally, the quarterly premium could die,” the second Singapore-based trader said.

This trend has now been exacerbated by the virus which is forcing consumers to put off purchases, sources said.

Previously, a potential bright spot for demand in the second quarter was for canned aluminium due to the upcoming summer Tokyo 2020 Olympic games.

But concern around whether the Olympics will go ahead is mounting due to the virus. The games are due to open on July 24. Market participants are also concerned that even if the event goes ahead visitor and spectator numbers will be much lower than previously expected.

“It was already very difficult to find any demand before the virus, and now that the Japan Olympics is not creating any demand, smelters just keep creating the metal and it goes straight to warehouses,” the first Singapore-based trader said.