SINGAPORE, June 11 -- Japan's aluminum buyers are reluctant to commit to third-quarter contract deliveries from major producers due to concerns about the strength of the global economic recovery, traders and market participants say.
Negotiations between industrial consumers of aluminum and producers like Rio Tinto Alcan and UC Rusal (0486.HK) over the premium buyers will pay above the London Metal Exchange price for physical delivery are continuing, with a deadline for agreement of June 15.
The producers are asking for $122, the low end of the $122-$125 range of premiums paid during this quarter, but the right now consumers are content to wait.
"There is no resolution yet. I think a discount (on second-quarter levels) is still possible," said an executive from the trading arm of a large Japanese aluminum consumer.
The European sovereign debt crisis and the ensuing flight from commodities and equities in global markets have muddied the waters for negotiators, as the outlook for demand is more clouded and consumers are attempting to use this as leverage.
"Let's be honest, the premium doesn't matter so much. What is $2 here or there? But it's understandable that the consumers are fearful and now content to sit and wait," said an executive on the sell side of the negotiations.
At the current LME three-month price of $1,950 a metric ton, a $2 difference in premium per ton would make only 0.1% of a difference to any transaction cost. Prices have fallen 22% from a recent peak of $2,487/ton on April 15.
However, the executive said he expects the negotiations to be resolved by the end of next week, with agreement likely to be reached around the $120 mark.
"The demand side is fairly stable so in that sense nothing has really changed despite the sell-off in commodities," said the buy-side executive.
Aluminum demand from the automobile sector is firm, while Japan's construction sector is still weak, he said.
There have been signs recently that the aluminum market in Asia is less tight than it has been recently, with China exporting aluminum and premiums in Korea falling to $103 in a recent tender from $115 in May.
Premiums from the Indian state-owned producer National Aluminium (532234.BY) have remained firm though, with a tender for 9,000 tons agreed at $88 this week, higher than previous tenders this year.
Industrial consumers cannot rely on buying from the market on a piecemeal basis, as aluminum inventories on a global basis are still mostly tied up in contango financing deals and unavailable.
Financing deals work as long as the market stays in contango, with holders of physical long positions rolling forward short futures positions and pocketing the profit from the higher futures price, after paying associated interest and storage costs.