[ferro-alloye.com]The Japanese quarterly aluminum contract premium negotiations, which traditionally set the benchmark for trade across Asian markets, have come under strain again as talks for the third quarter remained unconcluded at the end of the second quarter.

The delay in the settlement for Q3 stems mainly from the wide spread between bid and offer levels over most of the negotiating period to date, sources said.

Japanese demand has been hard hit by the coronavirus pandemic, and talk was rife that many buyers were looking to cancel or reduce Q3 requirements. Producers, however, have been unwilling to lower offers as Chinese demand picked up recently on arbitrage opportunities and because premiums for delivery to China were much higher than to Japan, sources added.

Since the start of Q3 negotiations, only one trade has been reported at $85/mt CIF. Producers have kept offers mostly at $82-$85/mt during the talks, while potential buyers stood firm at around $75/mt. This week, the gap has narrowed to $79/mt bid against $80/mt offered, but no fresh trades have been reported yet.

Premiums delivered to China were reported at $110/mt CIF or higher for July cargoes.

Market participants, however, have expressed concern that the Q3 premium might not be reflective of market levels if not enough deals get concluded. The delay in the quarterly settlement might also affect other contracts which are linked to this benchmark, sources added.

"For the past two or so years now the negotiating process has been dragging on longer and the final reporting has, in turn, been later and later," a producer source said, adding that if negotiations were not concluded soon, clients would start pushing back, and the benchmark would lose relevance "as we will start to price/negotiate on spot numbers."

A Japanese trader said, traditionally, "Japan values long-term relationships and stability with producers, and so [they]re] willing to pay higher premiums. But this year, we've seen more spot offered and the spot market becoming more important because of the volatility. Maybe the market will do away with quarterly or long-term contracts in general over time."

Another Japanese trader, however, said the quarterly premium was likely to stay as it was used in many contracts for other aluminum products. "It is a kind of long-term commitment with sellers and [has] existed for many years," he said.

In the previous Q2 contract negotiations, there was a shift in the general trading trend, with fewer participants and non-traditional multi-cargo spot deals traded during the negotiating period, instead.

Major producer Alcoa skipped Q2 talks because of low prices and premiums at the time, with plans to sell the allotted volumes on the spot market in Japan and across Asia. Six multi-cargo strip deals were concluded between international traders and two major Japanese consumers during Q2 talks, for loadings over April-June at $82/mt CIF. Volumes for these contracts were not bound by annual contracts between buyer and seller, and totaled 3,000 mt for April, and 3,500 mt a month in May-June.

Six such multi-cargo trades were also observed during Q3 talks. Five trades were settled at a premium of $68/mt CIF for 3,000 mt/month over Q3, and one trade was settled at a premium of $60/mt CIF for 500 mt/month over Q3.

Historically, four Western producers — Alcoa, Rio Tinto, South32 and Rusal — and 15-20 Japanese buyers have been involved in the quarterly, term-contract premium negotiations for these annually-fixed-volume, long-term supply agreements.

Volatility in spot prices and tensions in negotiations have also resulted in other commodities in the metals sector suffering similar strains in long-term contract fixed price negotiations in recent years, including iron ore in 2009 and coking coal in 2012.

Moving away from fixed prices, these commodities eventually adopted formulas representing the monthly or quarterly averages of spot price indices, as these were deemed more representative of market value and fundamentals. Copper concentrate TC/RC negotiations have also faced similar challenges in recent years.

On July 1, S&P Global Platts assessed the daily spot Japanese import 99.7% Al P1020/P1020A premium at $68-$78/mt plus London Metal Exchange cash, CIF Japan, unchanged from June 29. The Platts Q2 premium for imported P1020 was $82/mt plus London Metal Exchange cash, CIF main Japanese ports, down from $83/mt in Q1.

The Q2 premium level also reflected an unusual shift in seasonal market trends. Historically, premiums to Japan are higher in first half of the year, especially Q2, as Japanese buyers tend to restock at the beginning of the new fiscal year starting on April 1. The current Q2 premium was the lowest since $75/mt seen in Q4 2016.

(S&P Global Platts)

• [Editor:王可]