PHYSICALS WEEKLY - Oversupply sends ali premiums to multi-year lows in Asia, US

London 23/08/2016 - The gloom in the physical aluminium market deepened this week, with premiums in Japan and the US both crashing to multi-year lows amid oversupplied conditions and sloppy London Metal Exchange spreads.

It was a similar story in copper - premiums sank in the US due to better scrap availability while the LME-SHFE arbitrage ratio remains closed, which has kept rates at depressed levels in Shanghai. Market participants continue to pin their hopes on restocking and higher production rates towards the fourth quarter.

Copper deliveries into LME-listed warehouses have also provided a distraction - around 49,000 tonnes have been put on warrant. The has led nearby spreads to widen - the cash-threes spread was last at a $16.75 contango, out from $11 last Tuesday.

Tin premiums were steady this week but there are few players in the market now that the LME price has soared to $18,700 per tonne. In zinc, consumers are likewise scared away by higher underlying exchange prices.

On the warrant side, interest has very much been centred on nickel in the Far East but some traders have claimed that the summer season has killed consumer interest in most of the metals.

ALUMINIUM PREMIUMS NOSEDIVE IN ASIA, US WHILE EUROPE SUNBATHES  

• Aluminium premiums took another beating this week, especially in Asia - rates there fell to record lows, according to FastMarkets records. The US market also slipped to six-year lows while Europe - still in its peak holiday season - followed the downtrend at a more moderate pace.  
• Oversupply and the insufficiently wide contango remain the main drags on premiums. At $4-5 per tonne per month, the contango in LME spreads barely covers financing costs, triggering the release of LME stocks into the market. This was the case in South Korea, Malaysia and Taiwan this week where warrants could be picked up via clearing at no fee.
• Some 40,000 tonnes of LME stocks could be available in Asia, a trader estimated. Another said a further 15,000 tonnes could be delivered before the end of the year.
• Premiums dropped 25 percent to $55-65 per tonne on a cost, insurance and freight (CIF) basis in South Korea - their lowest since FastMarkets records start in September 2011 - from $80 previously
• In Japan, spot CIF premiums fell 10 percent to $65-75 per tonne despite a slight drop in port stocks. Fourth-quarter supply contract negotiations are about to start - producers are expected to table initial offers well above spot levels but slightly below the third-quarter level of $90-93.  
• In the US, the Midwest premium fell to 6.0-6.5 cents per pound from 6.25-6.75 cents and the lowest since September 2010 - the region is overwhelmed by imported supply and consumers are demanding bargain prices.
• "It's terrible out there. We’re not in a normal buying cycle. [End-market output] might be decent but [consumers] aren't in the spot market because they're waiting for the bottom. That means we're only getting calls from sellers, which makes the [the premium] just dive even lower" - US trader.
• The big question now is whether the six-cent level will hold. Importers start to lose money due to freight costs when the premium falls below six cents, several market participants noted.
• Europe remains illiquid due to the holiday season but the absence of buyers in a market crowded by keen sellers pushed premiums $5 lower. Rotterdam was last at $60-70 per tonne on a duty-unpaid basis and $110-120 duty-paid in-warehouse while Italy and Spain both dropped to $150-160 duty paid on a free-carrier (FCA) basis.
• "The floor should be $50-60 [unpaid] unless spreads tighten, in which case we could go much lower, by about $20-30" - trader.
• The mating season is now expected to move slowly because consumers see the sharp downward trend in spot regional physicals premiums as evidence that there will plenty of affordable aluminium available early next year.

US COPPER PREMIUMS FALL ON MORE SCRAP, EYES ON DELIVERIES/CANCELLATIONS

• Premiums for physical copper were mixed over the past week, with more scrap in the US dragging rates there lower while the Asian and European markets stabilised in quiet conditions. All eyes are on copper deliveries onto LME-bonded warehouses and cancellations.
• The US Midwest delivered copper premium fell to 5.5-6.0 cents per pound from 5.75-6.0 cents. Higher Comex prices in July attracted fresh scrap into the market.
• "Cathode business is slow. You're not able to sell over six cents any more. And if you're bidding 5.5-5.75 cents, people are now returning your calls" - US trader.
• "When Comex climbed to $2.20 [per pound] scrap steadily came in. That really loosened the market" - US copper tube producer.
• In Shanghai, premiums were quoted at $40-50 per tonne CIF and in bonded-warehouse over LME cash prices. They have hovered around this depressed level since mid-April.
• "The market has totally lost its vigour - it's stuck here and I don't see any hope of change" - trader in China.
• Market participants highlighted the unfavourable arbitrage between LME and SHFE prices, which has stated negative for most of this year, and slow demand in the traditional off-peak season.
• The main focus is the massive deliveries onto LME-listed warehouses and the subsequent cancellations - since last Tuesday, 40,675 tonnes have been delivered into sheds in Southeast Asia while 11,900 tonnes have been cancelled in the same region.
• "The same big trading houses are playing the same game as before and the same Chinese smelters are involved but what smelters want is just cash" - second trader in Shanghai.
• European copper premiums were steady at $45-50 CIF Rotterdam - the market remains in holiday mode.
• "There's no one to buy [copper] in the middle of the August as most plants are closed and there's lots of copper around" - trader in Europe.

NICKEL PREMIUMS HIGHER IN ASIA, US ON DIFFERING DEMAND PROSPECTS

• Premiums for full plate nickel cathodes rose in Southeast Asia due to an increase in offers of SHFE-deliverable metal.
• Cathode premiums moved to an average traded range of $10-40 per tonne basis in-warehouse Singapore, Taiwan, South Korea and Malaysia; Russian material is being offered as high as $70 but little if any has traded.
• "Some big trading houses are in a hurry to sell as more offers are heard in the market but I don’t think $70 is a realistic number" - trader in Asia.
• Meanwhile, the SHFE nickel contract has remained well below that of the LME for the past month, sources said. Premiums in China remain at 19-month lows of $70-100 per tonne for both SHFE-deliverable and non-deliverable cathodes.
• "I keep being offered cathodes by people in China and Singapore... People clearly want to liquidate" - trader in China.
• Nickel stocks in the Shanghai bonded zone should hold around 60,000-70,000 tonnes as they were at the end of last month due to the negative import arbitrage restricting trade, sources said.
• "In Shanghai bonded warehouses there are huge inventories here … it's not a good time for imports" - second trader in China.
• Similarly, premiums in Japan have rise due to higher demand from manufacturers producing lithium ion batteries for electric vehicles. Full plate rose $10 to $140-150 per tonne CIF Japan this week.
• In Europe, trade has been more muted over the seasonal summer holidays; premiums are relatively unchanged. Full plate is still trading at $60-80 per tonne but briquettes have nudged up to $70-90.
• Meanwhile, commodity melting-grade nickel spot premiums for truckload volumes in the US have ticked higher to 16-20 cents per pound from 12-16 cents due to a combination of solid stainless steel production rates and a shortage of scrap.
• "We've been able to get some better numbers - a lot of that has to do with tightness in stainless steel scrap. There are a couple of mills that would normally use scrap who were forced to use primary" - US trader.

TIN UNCHANGED, LME PRICES HIT 16-MTH HIGHS

• Tin premiums were unchanged this past week, with consumers largely out of the market while prices soared to 16-month highs on the LME - they broke through resistance to peak at $18,745 per tonne on Tuesday, with availability on the exchange dropping to multi-year lows.
• On-warrant tin stocks in LME warehouses dropped to just 2,975 tonnes globally - the lowest since November 11, 2008. This has helped fuel a backwardation of $28 in the cash/threes spread.
• Also supporting price rises are supply-side stories about environmental transgressions and shutdowns in China, lower forecasts for Burmese mined production and continued slow exports from Indonesia. Still, physical demand for the metal remains muted and premiums are unchanged.
• "Nothing has changed, it's easy to get material" - consumer in Europe.
• Premiums for 99.9-percent-purity tin are at $350-400 per tonne in-warehouse Rotterdam.
• Similarly, premiums for in-warehouse material in Singapore are unchanged at $50-80 per tonne for 99.9-percent-purity tin - sources reported large stocks of the metal held off-warrant there.
• "There are a lot of hidden stocks and demand is not good" - trader in Singapore.

HIGHER PRICES SUBDUE ZINC INTEREST, SPREADS SWING TO BACKWARDATION

• Spot premiums for zinc were again steady across Europe and Asia this week while the metal continues to trade around its highest in more than a year, deterring many consumers in key price-sensitive regions. 
• "The price at the moment just means a lot of our customers are reluctant at these levels - I don't see that changing" - producer.
• Premiums for duty-paid zinc ingots in Rotterdam were quoted in a range of $130-140 per tonne FCA over LME cash prices, a level they have roughly maintained since early May.
• The key focus, however, is the backwardation that has now appeared in the nearby spreads; further increases could persuade some holders of metal to deliver onto the exchange, particularly in areas where there are large amounts of off-warrant material or indeed where certain parties are long metal.
• The backwardation on the benchmark cash-3s was last at $4, a swing from $7.25 contango last week. Cash/September was last at $6.
• Still, some traders expect the impasse in physical premiums to remain in place.
• "H1 was very quiet [and] H2 so far has been the same. I’m expecting the same premiums throughout the rest of the year unless something substantial changes in the market" - trader in Europe.
• "Our customers are very hand-to-mouth at the moment - they don't need to take extra tonnages" - European trader.
• In China, premiums in bonded warehouse and CIF Shanghai were unchanged at $90-110 per tonne amid slow demand.
• Liquidity remains capped due to the extended closure of the SHFE-LME import arbitrage; according to the latest indications, imports would incur loss of around $200 per tonne on the September delivery date.
• In India, while premiums have held at $170-190 for duty-free material, international sellers face downward pressure while operations normalise at Hindustan Zinc. The Indian producer is focussing its efforts on supplying on spot to domestic customers, sources said, creating a more competitive environment for imported metal.

NO MOVEMENT IN LEAD PREMIUMS, MARKET SUBDUED

• Lead premiums were again unchanged this week - traders reported a continued lack of demand for significant tonnages on a spot basis.
• Premiums for 99.97-percent-purity lead, used by most of the market, were stable at $45-65 per tonne CIF India.
• "If you thought zinc was quiet, lead is worse - lead is dead for us at the moment" - Asian trader.

(Editing by Mark Shaw)