Japan Q1 2007 aluminium talks to start end-Nov; premiums to fall

Japan is set to begin aluminium contract negotiations for the first quarter of 2007 by the end of November, local industry sources said Wednesday.

"The talks are expected to start late November and be completed by mid-December. We are expecting to complete our talks by December 15," one trader said. "We also expect the talks will start around November 20 and end around mid-December," another trader added.

Both traders said they expected Q1 premiums to fall on the back of high stock levels and slow demand.
"We expect premiums for Q1 to lower at least about $10/mt, mainly because there is no tightness in the market," one trader said. "In the fourth quarter of this year, US and other countries had high premiums, so producers asked us to follow with high numbers. But now we think it is not reflecting the stock levels, so the numbers must lower," he added.

Premiums for Q4 2006 contracts were mostly settled at $82-84/mt. The trader said Japanese port stocks level stood at about 225,000 mt at the end of September, including the three major ports.

The second trader agreed that high port stocks were "a major headache for traders," but said the drop in premiums for Q1 2007 "may not be as high as $10...maybe about $5-10" because of the recent export tax changes in China.

"China increased its export tax by 10% recently and that will have major impact on Japanese buyers who have signed contracts to buy from them. They want higher prices now and so the Japanese are looking elsewhere. Where can they look except to Russian and Good Western stocks?" the trader said. "In the short term, there will be not much exports expected from China," he added.

China raised its export tax on aluminium ingot to 15% from a previous 5% effective November 1, 2006.
The first trader said another main reason for expecting lower premiums in Q1 2007 was the recent backwardation in aluminium.

"Our current concern is the December-January period, we are worried the backwardation will last for a few more months. If that is the case, we must maintain the carry costs so we will need lower numbers," he said.

A Japanese consumer source also expected lower premiums in Q1 2007 for the same reasons the traders mentioned. "Port stocks are very high, backwardation is an issue, and domestic demand in the second half of this year has been very slow. We don't expect demand to pick up until the first half of next year," he said.