Japan's need for aluminum premium futures is limited, London Metal Exchange CEO Garry Jones told the LME Tokyo Gala event Tuesday.
LME launched four physically settled regional aluminum premium contracts, including Northeast Asia premium contracts for delivery to Japan and South Korea, in November 2015.
"They were launched when the market was high. Premiums have since come down and there is less demand," Jones said.
Chicago Mercantile Exchange launched a cash-settled Japan premium contract, settled against S&P Global Platts CIF Japan spot premium assessment, in December 2015.
Jones said in his observation, the CME contract managed to attract only a small volume.
"You need insurance when a flood comes back... but premiums remain inactive in the meantime," he said.
The premium contract issue was raised during a panel discussion involving Japanese buyers, financial players and an analyst.
Discussion moderator Xu Xiao, the head of LME Japan, asked the panelists if there was a tendency among Japanese buyers to shift to monthly set premiums from longer term periods.
Masafumi Hisatune, procurement general manager at Nippon Light Metal, said he was seeing an increase in monthly set premiums.
"Should we negotiate every and every month? Transactions floating on the premium index are not zero," he said.
Several Japanese buyers and overseas sellers have long term contracts for 2016 floating on the CME premium index, according to an S&P Global Platts survey. Spot cargo offers basis Platts CIF Japan monthly average have also emerged in the second half of 2016.
However, gala participants shared Jones' observation that liquidity was the key issue for premium contracts.
Some said premiums had fallen to account for less than 5% of the total aluminum price from 15-20% two years ago, and less hedging was needed.
"The question is, will end-users, who process our [intermediate] products, want to hedge?" one participant said.
Japanese end-users, who typically buy 25-100 mt lots monthly, purchase from local traders in all-in-one yen prices rather than on a US dollar formula of LME plus a premium.
MONITORING CHANGE
One Japanese end-user, who currently purchases from local traders in yen, said he was aware his competition was changing raw material purchasing methods and he attended the LME seminar to collect market forecasts.
Robin Bhar, Head of Metals Research at Societe Generale, told Platts on the sidelines of the event that while LME aluminum prices were bullish, premiums were steady. He forecast Japanese spot import premiums to hold stable above $60/mt for 2017, and for LME aluminum to average $1,725/mt in 2017, up from $1,615/mt for 2016 to date.
Funds participation in contract trades will boost liquidity, noted panelist Kazuya Uchida, a senior trader at Mitsui & Co.
"There are positive as well as negative impacts of funds trading. There is more benefit, as they will increase liquidity as well as consistency in trade volumes. Oil prices took a long time to fall, whereas there were sudden jumps in the US Mid West premium levels because trade participants were mostly physical market participants and tended to look in one direction," Uchida said.
"Funds could cause exaggerated price moves but physical market participants are able to take advantage of them, like buying when prices are very low," Uchida added.
A second end-user said he was seeking to use aluminum derivatives to stabilize his aluminum purchase costs, rather than making financial gains.
Japanese aluminum buyers are currently in negotiation with overseas producers for first quarter 2017 contract premiums as well as the structure and pricing of 2017 contracts.
