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US import arbitrage unlikely to faze Asia

Dec 06, 2017 | 11:31 AM |

Tags  Asia aluminium supply, aluminium premiums, US aluminium import arbitrage, LME, aluminum stocks, Vivian Teo

SINGAPORE — Import arbitrage opportunities in the United States have diverted some aluminium in Asia to the United States but this is unlikely to cause supply in Asia to tighten in the near term, market participants said.

The US Midwest aluminium premium reached its lowest point of the year in July at 6.75-7.25 cents per lb, recovering to 9.25-9.7 cents per lb by late October. The premium had peaked at 10-10.25 cents per lb in early February, the highest level since May 2015.

The recovery in the US premium has prompted some London Metal Exchange warrant cancellations of aluminium sows and T-bars in Asia - these shapes are popular in the US but less so in Asia. Still, such cancellations are not likely to affect the supply/demand balance in Asia dramatically.

There had been a spate of warrant cancellations in Asia over the past few months. In Port Klang in Malaysia, LME on-warrant aluminium stocks fell to 77,075 tonnes on Friday December 1 from 128,225 tonnes on September 1. Over the same period, on-warrant stocks in Singapore dropped to 106,975 tonnes from 196,600 tonnes, while those in Busan, South Korea, eased to 97,100 tonnes from 117,200 tonnes.

Some of the canceled warrants are being moved to other warehouses offering lower storage costs, while some are being shifted to other warehouses in preparation for 2018 sales, sources said.

Metal Bulletin's aluminium arbitrage indicator tool shows profits of $73.57 per tonne from ports in Singapore in November, $82.87 per tonne in Busan, $88.85 per tonne from Johor, Malaysia, and $88.85 from Port Klang for shipments of 10,000 tonnes via break bulk from canceled LME warrants.

This is up from $30-89 per tonne in Singapore in July, $38.32 per tonne in Busan and $46.19 per tonne in both Johor and Port Klang.

Still, a positive outlook for premiums in Asia in the first quarter of next year could also lead to more sales in the region rather than metal being shipped to the US, market observers noted. 

Quarterly aluminium premiums in Japan - Asia’s largest import market - are expected to rise in the first quarter of next year. Offers started at $110-115 per tonne, up around 20% from the fourth-quarter settlement of $94-95 per tonne.

Stable Asian premiums; stocks still ample
After a downtrend since April, spot premiums in Asia have largely stabilized thanks to the persistent contango in nearby LME spreads, winter production cuts in China and a bullish outlook for premiums in the first quarter because of rising US and European premiums.

Metal Bulletin assessed the Japan spot cif main Japanese ports (MJP) aluminium premium at $85-100 per tonne on November 28, unchanged since October 31, while the aluminium premium in South Korea was at $100-110 per tonne fca on November 28, where it has held since October 17.

The premiums are holding up because sellers are reluctant to sell and/or lower offers - they are holding on to material in anticipation of higher premiums in the first quarter. This has created the appearance of tighter supply in the region, sources said.

Although industry participants note a slight supply tightness for good western LME warrants and good western off-warrant material in Asia, most agree that the market in this region is not genuinely tight.

Inventories in South Korea have fallen over the past year largely due to domestic consumption but they are still viewed as high, particularly in Busan, sources said. While there are no official estimates on total inventory levels in the country, market participants believe that there could be some 400,000-500,000 tonnes of stocks in the country when including visible LME stocks.

Compared with about a year ago, on- and off-warrant stocks in South Korea were estimated as high as almost 700,000 tonnes.

In China, despite the government crackdown on illegal smelting capacity, high stock levels in the country are preventing any tightness there.

Stock levels in Shanghai Futures Exchange warehouses continue to set records - deliverable stocks in the warehouses reached 702,321 tonnes on December 1.

China’s monthly aluminium production has declined year on year since July due to supply-side reforms and environmental crackdowns in the country but output from January-October still increased by 3.7% on an annual basis to 27.23 million tonnes.

Winter production cuts, which will be carried out until mid-March, are underway in various provinces in the country. But the cuts are now said unlikely to be as severe as initially expected.

“Supply next year is not going to be tight,” a Shanghai-based trader said, estimating that there are now some 1.7 million tonnes of aluminium stocks in the country. “The only way to reduce the high stock levels is to let falling aluminium prices force smelters to shut capacity.”

But this seems unlikely while high LME aluminium prices encourage producers to produce at full capacity, industry observers said.

“There is little drive for smelters to cut production in the near term given the high smelting profits,” China’s Minmetals Jingyi Futures said in a report on December 1.

LME three-month aluminium prices had surged in August this year to more than $2,000 per tonne, peaking at $2,215 per tonne in late October - its highest since March 2012. The price has since eased, closing the official session at $2,043 per tonne on December 6, although it has held above $2,000 per tonne.

Indian producer Vedanta is also reportedly planning to increase capacity by almost 1 million tonnes per year to 2 million tonnes per year at is Jharsuguda aluminium smelter in the coming years.

“I don’t see supply in Asia becoming tight. Good western material is always a little tight but there will still be enough production in Asia,” a second trader in Singapore said.

Echo Ma, Shanghai, contributed to this article.

Vivian Teo


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