London 19/09/2016 - South Korea's emergence as a hub for financing aluminium and the subsequent influx of metal is weighing on the Southeast Asian market, with warrants now freely available and with zero premium over cash costs.
A net total of 169,250 tonnes have been delivered into LME-registered warehouses in South Korea so far this year compared with 20,275 tonnes in 2015 and a fall of 21,075 tonnes in 2014. There are currently 243,575 tonnes on warrant in sheds in Busan, Incheon and Gwangyang, representing 18 percent of stocks, up from four percent at the start of this year.
Simultaneously, due to consistent stock drawdowns in Vlissingen in the wake of new LME rules, availability in Korean ports has jumped - traders are now able to pick up warrants through LME clearing in the Korean port with relative ease. Warrant traders are reportedly sifting for premium brands on the LME in the region.
Cancelled warrants are also relatively much lower than in other locations - a combined total of just 4,525 tonnes are listed in the three Korean ports compared with 65,100 tonnes in Rotterdam, 36,825 in Singapore and 525,700 tonnes in Vlissingen.
Outside the LME, South Korea also holds 400,000 tonnes of off-warrant material, much if not all of which is potentially deliverable onto the exchange.
There was a large 30,000-tonne delivery in August, with speculation that more would follow in the coming weeks. Since then, a further 11,325 tonnes have arrived.
"These deliveries for sure are just coming from off-warrant stocks. I think they will continue too," one trader in Singapore said at the time. "It also seems like it was more of a strategic decision someone has taken rather than just a delivery against a backwardation."
There are unconfirmed reports that warehouses are now offering small incentives of up to $40 per tonne to deliver metal on-warrant.
Still, increased output from Indian producer Hindalco and Malaysia's Pressmetal has found a ready home in Korea, where merchants are keen on duty-free metal in a climate of tight margins, which deepens the bearish cash for premiums.
All of these elements are attracting aluminium from other producers into the region's markets.
Premiums for warrants in Singapore, South Korea and Malaysia are all at $0-5 in-warehouse while CIF premiums are at $55-65 in Korea and Malaysia and $60-70 in Singapore. This is down from $100-110 CIF at the start of 2016 for the same material and nearly $400 at the start of 2015. Warrants are down from over $60 at the start of this year.
A weak domestic market and easy access to duty-free supply from producers in Asia and Australasia have made the country a prime location for warehousing and financing aluminium, prompting the large deliveries of metal onto the LME..
The country's shipbuilding sector - a major consumer of aluminium - has been in severe decline for the past few years. The country's three largest shipbuilding firms - Daewoo, Hyundai Heavy and Samsung Heavy - all posted losses in 2015; reports suggest 2016 will be no different.
Massive overcapacity in freight vessels in particular and a collapse in energy prices have cost the South Korean industry dear, while competition from Chinese shipbuilding is growing.
Outside of shipbuilding, the country's construction sector is struggling, according to local sources, although the automotive sector is holding up well - sales in the first eight months of the year were up 5.3 percent at 1,041,086 vehicles from 988,512 in the same period of 2015.
In the wider picture, the forward spreads continue to dictate financing and demand. Aluminium's spreads have been tight for some time; although the benchmark cash-3s is in contango, at $12 it is not enough to incentivise the holding of metal but neither is it enough to force physical sale at low premiums or to deliver in to secure weak incentives.
This suggests that the recent deliveries into Korea are part of a wider strategic decision from certain holders and perhaps that a new area of financing is in play.
As well as enjoying easy access to the LME's warehouse network across Southeast Asia, Korea is also close to one of the world's largest consumer of aluminium, Japan.
Since the country imports almost its entire annual consumption requirement of around 1.7 million tonnes per year of aluminium ingots, it provides something of a safety net for those holding aluminium in Korea, with the ports of Nagoya, Yokohama and Osaka within touching distance should any holders wish to liquidate metal into the physical market.
(Additional reporting by Archie Hunter, editing by Mark Shaw)