COLUMN-China's aluminium imports underpin physical premium surge: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters)

* CME aluminium premiums:

* China's aluminium imports:

LONDON, April 1 (Reuters) - Japanese aluminium buyers have agreed to pay the highest premium in six years to get their metal in the second quarter.

The Japanese premium [PREM-ALU-JP>, which serves as a benchmark for the wider Asian market, has risen for three straight quarters to $148-149 per tonne over London Metal Exchange (LME) cash prices.

Rising physical premiums are a global phenomenon amid consumer restocking as the demand recovery gains momentum and turmoil in the shipping sector, which was restricting supply to consuming regions even before this week’s blockage of the Suez Canal.

U.S. premiums are back above $400 per tonne for the first time in two years, while European premiums have leapt to three-year highs.

Even the world’s largest producer - China - seems to be running short of aluminium. Its continued purchases of metal from the international market are underpinning the global premium surge.


China started importing primary aluminium in the second quarter of 2020. It was the first time the country had tapped international markets since the Global Financial Crisis.

Both aluminium demand and prices bounced back earlier and stronger than anywhere else last year thanks to China’s early exit from COVID-19 lockdown. That opened up an arbitrage window through which aluminium has been flowing ever since.

Imports remained strong in the first two months of this year, the country sucking in another 245,000 tonnes of primary aluminium and 141,000 tonnes of alloy.

The cumulative net draw on primary metal from the rest of the world now stands at 1.3 million tonnes, compared with 1.5 million tonnes during the 2008-2010 period.

China turned net importer of alloy only briefly back then but this time around the shift to net importer status looks more structural with the cumulative tally standing at 1.1 million tonnes since the start of 2020.

This new alloy trade is dominated by Malaysia, which has emerged as a processor of lower-grade scrap now banned by the Chinese authorities. A similar phenomenon is taking place in the copper scrap sector.

Chinese alloy imports, in other words, may be here to stay.

Primary imports may prove more volatile as the London-Shanghai arbitrage gyrates in and out of import-friendly territory.


China’s pull on aluminium from the rest of the world is reducing the surplus built up during last year’s manufacturing collapse and therefore the amount of metal now available for restocking.

It is also having an indirect influence on availability for European and U.S. manufacturers.

After China’s import gates started opening last year, ever more aluminium has gravitated to the Asian region to capitalise on the potential for future buying.

Over 90% of the registered stocks in the LME warehouse system are now located at Asian locations, particularly Malaysia’s Port Klang, which holds 1.13 million tonnes.

European locations hold a total 136,000 tonnes and those in the United States just 44,000 tonnes.

The same geographic distribution is evident in LME shadow stocks. The exchange’s most recent off-warrant stocks report showed 1.63 million tonnes of shadow stocks at the end of January, of which 1.38 million tonnes were sitting at Asian good-delivery locations.

It’s worth remembering that this is very different from how things played out in 2009-2010, when global surplus accumulated at LME locations first in the United States (Detroit) and then in Europe (Vlissingen).

Today most of the readily-accessible inventory is located within easy shipping distance of China.


This mass relocation of aluminium eastwards has left buyers elsewhere short of inventory cover, leaving them exposed to the trials and tribulations of the shipping sector, which was facing severe disruption from COVID-19 backlogs even before the Ever Given blocked one of the world’s busiest traffic arteries.

U.S. buyers have been further hampered by a quota on Canadian imports, which was the condition set by the administration of President Donald Trump for exempting Canada from the 10% aluminium import tariff.

Unfortunately for U.S. manufacturers, the quota applies specifically to the commodity-grade ingot which the country now appears to be running short of, which is why the U.S. Midwest premium has risen particularly sharply since the start of the year.

With the physical supply chain struggling to supply units in the right place at the right time and little sign of any easing in the stressed shipping sector, premiums look set for further rises in the short term.


Physical aluminium buyers, not for the first time, find themselves competing for units with stocks financiers, who have tied up large amounts of metal in profitable deals using the LME forward curve, which spent a large part of last year in finance-friendly contango.

Rising premiums are a sign of this increased competition for metal. High premiums are an upfront cost for financiers and instill a level of risk into financing stocks, given the potential for premiums to drop over the course of a deal.

Physical demand can also be expected to tighten the LME curve, reducing the ability of stocks financiers to lock in higher futures prices.

The benchmark LME cash-to-three-months time-spread CMAL0-3 closed Wednesday valued at a contango of $24.50 per tonne. Two weeks ago it was $35.50.

There is no contango at all on the Shanghai Futures Exchange (ShFE) aluminium contract. The futures curve is backwardated through October.

There is evidently still considerable supply stress for commodity-grade metal in the Chinese domestic market.

Inner Mongolian power restrictions have fuelled the market heat. Suggestions that the State Reserves Bureau might offload some of its stockpiled aluminium bear all the hallmarks of the authorities trying to damp the speculative flames.

The Chinese domestic aluminium market is as disjointed as it’s been in many years and there’s a lot of metal sitting in Asia on the premise the country’s going to need more primary metal.

That’s bad news for aluminium consumers everywhere else.

Editing by Kirsten Donovan