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Japan's Q4 aluminum premiums supported by US premiums, LME contango: sources

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Japan's fourth quarter contract premium for aluminum will fall from Q3 but downside is limited, as there is support from the rising US premium and the London Metal Exchange contango spreads, market sources said Monday.

Two producers offered to Japanese buyers a Q4 contract premium of $100/mt and $110/mt plus LME cash, CIF Japan, last week, which was a decrease from $118-$119/mt CIF Japan for Q3.

One Japanese buyer said he made a counter-bid of $90/mt CIF Japan, while another buyer said he planned to bid at $80-$90/mt CIF Japan.

Japanese buyers said there were two approaches to forming Q4 bids: on the basis of the Q4 US Midwest premium outlook, as the Japanese market was expected to track the US trend, or make the Q4 Japan market forecast independently from the US trend.

Some said the gap between the Japanese and the US premium will cause Asian supplies to flow into the US, while others said this happened in Q1 but may not in Q4.

The Platts US Midwest spot premium rose to 8 cents/lb ($176/mt) plus LME cash, delivered Midwest, on September 5 and held at this level on September 8.

The premium was up 10% from the recent low of 7.25 cents/lb delivered over July 17-25.

"There is no further downside," said one global producer, and Japanese market participants agreed.

Japanese market participants are expecting the Midwest gains to continue, to approach 9 cents/lb within Q4, up 20% from the mid-July delivered low.

Their Q4 Midwest forecasts are based on Chicago Mercantile Exchange premium swaps trades, which are settled basis the Platts Midwest physical premium.

The CME Midwest swaps traded at 8.8 cents/lb on September 8 for October-December contracts.

The Q4 bid of $90/mt CIF Japan is roughly 20% above the $73-$75/mt CIF Japan assessment, the most recent low marked in mid-August.

The US Midwest rise is giving support to Japanese and other regional premiums, but there were mixed views on how strong the support would be.

"The Japan premiums should follow the Midwest up, otherwise, there would be a gap between the two premiums and we would see the metal flow into the US," said one Europe-based market participant.

But unlike Q1, global spot supplies and LME warehoused cargoes are not making their way to the US, some Japanese traders also pointed out.

A US trader previously said his company would buy imports at $115-$120/mt plus LME CIF New Orleans and offers were at $130/mt CIF, $20-$30/mt higher than Q4 Japan premium offers.

"If US CIF premiums are $20-$30/mt higher than the Asian standard, Asian supplies will be directed to the US, if your scenario is based on freight differences," pointed out one Japanese trader.

He added, however: "You also need to consider that Asian supplies are mostly ingot, which is not widely in use in the US, and also the longer time to deliver the metal from Asia, which makes Asian supplies unpopular."

"T-bars will find buyers, but not ingot," said a second Japanese trader.

The LME contango spread is also giving support to premiums, sources said. The contango will limit aggressive spot sellers in global markets, as the cash-three month spread of over $25/mt will allow stock holders to keep stocks and hedge by buying forward contracts, also called "pre-borrowing," they said.

Cash-3 months were $27.50/mt in contango at Friday's LME closing during London hours.

The only concern is a possible reduction in the LME stocks causing prompt LME contract prices to rise and cause backwardated spreads, said a third Japanese trader.

LME aluminum stocks stood at 1.32 million mt September 7, up from 1.28-1.29 million mt on the week of August 14 when the LME nearby spreads were in backwardation.

Separately, some overseas market participants pointed out that the Japanese quarterly premiums were always higher than spot premiums.

This shows Japanese buyers value for long-term relationships, said one Japanese market participant.

There are services and flexibilities not written in contracts which producers provide, although in varying degrees, he added.

Japanese market participants said some producers selectively ship low iron material of P0610 or P1012 specifications to Japan, although contracts are for P1020.

"Japanese traders are also to draw effective sales strategies tailored to different customer needs, because they know what metal brand they were getting on contracts, but this is not possible with LME warehoused stocks," he said.

Some producers are flexible about changing shipment schedules. Some also provide buyers volume options of 100 mt/month, while some do not.

"Not all producers have the same type of flexibility. It depends on how committed buyers-sellers are in maintaining their long-term relationship," he added.

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