Aluminum premiums set to soar 35% in Japan

Japanese buyers of aluminum ingots have agreed to pay higher premiums for the next three months, giving priority to stable purchases over cost.

The premium for the April-June period has been set at $128 a ton, including shipping fees and insurance, representing an increase of $33, or 35%, from the preceding quarter. That is the highest since the summer of 2015, when excess output in China sent prices tumbling.

Demand is growing in the U.S., particularly in the auto industry, resulting in inventories running low. Shipments of ingots from Canada and elsewhere have yet to ease the shortage, and spot premiums in North America have surged 60% in the last six months.

This upturn is funneling ingots originally bound for Asia to North America instead, said an official at a smelter. Speculation is also emerging about capacity cuts in China, where tighter pollution regulations have been introduced. This has contributed to a growing sense of a supply shortfall in Asia.

Japanese demand is expected to increase, particularly among can manufacturers, ahead of the summer. This has encouraged Anglo-Australian resource giant Rio Tinto and other overseas smelters to seek a second straight quarterly price hike. Seeking to secure procurement of raw materials, trading houses and metal-processing companies in Japan consented to the increase.

The London Metal Exchange's three-month aluminum futures -- another element shaping ingot prices -- are also on the rise. They now trade at around $1,960 a ton, up 20% from December, amid rising smelting costs stemming from higher crude oil prices. Hopes for robust infrastructure spending in the U.S. under the Trump administration have also added upward pressure. With the premium hike, cash prices for Japanese buyers are at the highest in about a year and a half.

The upturn in cash prices likely will push up costs of such final products as cans and building materials. The products' manufacturers usually secure ingots under long-term contracts, so the upcoming rise is unlikely to lift procurement prices anytime soon. But a sustained increase will hurt the companies' bottom lines, said an official at a Japanese can maker.

Building materials producers may get hit hardest.

If window sash makers pass higher ingot costs onto customers, aluminum sashes will lose their pricing edge over increasingly popular plastic varieties. This may result in a smaller market share for aluminum sashes. The market for aluminum building materials is projected to shrink 3.7% in fiscal 2017, according to data from the Japan Sash Manufacturers Association.