Market participants involved in negotiations for Japan's third-quarter aluminum premiums, seen to fall from Q2, described the talks as supply-demand rebalancing ahead of China's output cuts expected in Q4.
The Q3 talks are about discovering where the supply and demand has re-balanced, following the steep rise in Q2 premium led by the steep rise in US premium and the Australian smelter cutbacks during the quarter, said producer and trader sources.
The US spot premiums, which stood at 8.9 cents/lb delivered Midwest as of Wednesday, have fallen 9.6% from 9.85 cents/lb on April 3.
The idled smelting capacities in Australia, caused by power supply issues, are currently being ramped up, sources said.
Output cuts by Indian and Middle Eastern smelters in Q2 had limited impact on Japan as these two regions do not actively export to Japan, they added.
Due to the subesequent fall in US premium and recovery in Australian output, no producer has asked for a hike in Q3 premiums from Q2, Japanese buyers said.
Producers offered in the range of $123-$128/mt plus LME cash CIF Japan, down from $128/mt plus LME cash CIF Japan for Q2.
A Japanese buyer said counter bids were likely on the basis of how much the US premiums have fallen in the past quarter, as the US premium rise had triggered the 35% hike in the Q2 premiums.
Japanese buyers generally put $110-$120/mt plus LME cash CIF Japan as the possible Q3 settlement level.
LME warrants that were canceled and taken out of LME warehouses since March, are also affecting the supply balance, some sources pointed out.
"There are around 200,000 mt of canceled warrants left somewhere in the market. Where have they gone to, I wonder," said a Japanese trader.
"Have they gone back into the LME warehouses or at non-LME warehouses? We don't know," said a second Japanese trader, adding that there was no point discussing LME warrants in the premium negotiation.
"It is meaningless to negotiate on the basis of uncertainties," said the second Japanese trader.
Generally speaking, warrant supplies, replacing producer sales, pushed down premiums in Asia, a Japanese consumer said. But it was difficult to see where the warrant metal market levels were, due to the diversity of warrant supplies.
Producer and consumer sources said there are three types of warrants in the market: brand-specific warrants, good Western-brand warrants, and warrants of any origin and any shape.
Their market values would also depend on the metal's production year, bundling conditions, and storage conditions that affect metal surface, sources added.
"In Southeast Asia, warrant metal trades are not actively traded as before, because Q3 Japan premiums were seen to fall. What is the point of getting new supplies when general market trend is down?" said an international trader.
Some sources said the Q4 premiums will reflect a totally different supply-demand landscape as China's output cuts led by environmental controls will start impacting markets outside of China. But some other sources said it was too early to tell.
