London - The decline in aluminium premiums has come full circle.
The surcharge that consumers pay to obtain the metal started falling in Europe in November, spurring US declines in February. The global domino-effect was completed last week, when people involved in the negotiations told Bloomberg News that Japanese buyers will pay less amid a regional oversupply.
The rates are falling from an all-time high as demand for aluminium can’t keep up with record exports from China, the biggest producer of the metal. Aluminium for delivery in three months on the London Metal Exchange dropped 4.8 percent this year as some traders unwound financing deals and warehouse backlogs eased.
“There is a wall of Chinese supply this year,” Max Layton, an analyst at Goldman Sachs Group in London, said in a March 3 interview. “Both the premium and the LME price have come off, and that’s telling you that the balance is definitely weakening.”
In Japan, the surcharge for the three months beginning in April will drop to $380 a metric ton above LME cash prices, from a record of $425 this quarter, said people last week at two buyers, who asked not to be identified because the talks are confidential.
European premiums
Premiums in Europe fell to $300 a ton during late February from $425 to $445 on November 25, the biggest drop in at least 17 years, according to Harbor Intelligence. In the US, the decline last month was the steepest since the 1990s, the Austin, Texas-based research company said.
Production will exceed demand by 460 000 tons this year, the most in three years, after supply shortages in 2014, according to Goldman Sachs. The glut signals further declines and prices may slump 6.4 percent in the next several weeks, Bank of America wrote in a March 4 report.
The biggest source of extra supply is coming from China, which accounts for half of the world’s production, according to Standard Chartered. Exports in January and February were about 80 percent more than last year, China’s customs data show.
Shipments are flowing out of the country as companies find ways around an export tax on blocks of primary aluminium, according to Michael Widmer, an analyst at Bank of America in London. The metal is often turned into sheets or plates, which are exempt from the tax, he said.
‘More painful’
More aluminium is available as some traders abandon unprofitable financing deals, according to Wood Mackenzie Ltd, an Edinburgh-based researcher. The transactions, which involve buying a short-term contract and selling a long-term one, lose their allure as the difference narrows between prices now and in the future.
“We are seeing the availability of metal improve,” Nick Madden, the chief supply chain officer of Novelis, said in an email to Bloomberg News. “They’ve been artificially inflated for too long.”
The Atlanta-based producer of beverage-can and car-frame material was among the first to complain about incentives offered by warehouse companies to attract metal. The LME has taken steps this year to reduce delivery times for aluminium and crack down on potential market abuse. Queues last month were 467 days in Detroit and 560 at the Dutch port of Vlissingen, the biggest aluminium repositories, down from as long as 748 days in April 2014, according to data from the exchange.
Alcoa, the largest US aluminium producer, is reviewing the future of 500 000 tons of aluminium-smelting capacity amid weak prices and increased supply from China, according to a statement from the New York-based company last week. Consumption of the metal is weakening in Western Europe and Japan due to a sluggish economic growth, according to Eoin Dinsmore, a consultant at London-based CRU Group.
“We are stocked up with metal,” Uday Patel, an analyst at Wood Mackenzie in London, said by phone March 3. “The market in China is very much in surplus at the moment. Some of this metal is now starting to land in the Western market.”
* With assistance from Laura Clarke in London, Aya Takada in Tokyo and Joe Deaux in New York
Bloomberg