What the ‘MJPexit’ debate implies in the aluminum market

Debate is flaring in Japan’s aluminum industry ahead of the fourth quarter contract premium negotiations about the future of term pricing, popularly dubbed as MJP or main Japanese port.

For over a decade, Japan has been sourcing 1.5 million mt/year primary ingot imports on annual contracts. Volumes were fixed for one year, and prices were London Metal Exchange cash plus the premiums, CIF MJP basis, and the premiums were negotiated quarterly.

Four producers and 15 to 20 Japanese buyers have been in the quarterly talks.

Around 10 other producers and international trading houses have term contracts with Japanese buyers. They generally don’t negotiate the premiums, but follow the quarterly settlements reached by the four producers.

MJP has evolved along with market changes such as geographical shifts in the supply chain, LME reforms and the growing impact of China.

The 2015 premiums crash, from $425/mt plus LME cash CIF Japan to $88.50/mt, accelerated the MJP evolution.

A supply contract just for one quarter was signed between a producer and a Japanese trader in Q3 2015. This move was unnoticed because the standalone quarterly premium and the quarterly premium in annual contracts were the same.

Japanese aluminum premiums 2016

Japanese Aluminum PremiumsSource: Platts

When several standalone quarterly contracts were signed for Q3 2016, $10/mt lower than those integrated into annual contracts, debate arose on which contract was representative of the market.

The widening gap between the quarterly and the spot premiums has also sparked discussions.

On Aug. 9, the Platts CIF Japan spot premiums stood at $76-$77/mt plus LME cash CIF Japan, 16% below the Q3 premiums of $90-$93/mt.

More Japanese market participants are talking about reducing contract purchases and increasing spot, seeing premium volatility to be a bigger risk than supply disruptions.

Buyers also have more supply sources such as the new smelters in India and Malaysia, and banks active in the physical market.

Some Japanese consumers, who had outsourced purchases to Japanese traders, are looking to do some spot imports themselves for the first time.

One consumer has launched a do-it-yourself procurement project in 2016. The Chicago Mercantile Exchange launch of Japanese spot premium contract trades also pushed this initiative.

Some sellers in favor of MJPexit

Stock levels are up in Asia outside of Japan, and some suppliers want to clear them before 2017 by selling to Japan.

Two traders started to contact Japanese buyers in early August for possibilities of a contract just for Q4. Some banks have been in talks with Japanese companies since June for 2017 contracts.

Meanwhile, Asian consumers have said the MJP system provides market stability, not just in Japan but to the whole of Asia.

Producers feel their efforts to ensure supply stability to annual contract customers need to be recognized and reflected in the premiums.

By the second half of 2016, at least two Japanese companies have totally disengaged from annual contracts.

Some more may leave the MJP system as the gap between the value propositions from “the MJP Union,” and MJPexit players widen. While sellers say they generally target a rollover in the Q4 premiums from Q3 at $90-$93/mt plus LME cash CIF Japan, there is an offer for a standalone Q4 contract of P1020A-grade ingot of mixed origins at less than $70/mt plus LME cash CIF Japan.

Redefining aluminum specifications

The significance of the MJPexit debate is not about trading house A exiting or consumer B remaining,  but rather, how it triggered reviews all existing practices.

The debate highlights advances in aluminum smelting technology in the past decade. New smelters brought on-stream in the last eight years have been able to produce 99.8-99.9% purity aluminum constantly and shorten production lead time, thanks to enhanced electricity current flow engineering techniques.

Some new smelters were deliberately designed to produce 99.8-99.9% grades, as the aluminum to be used for billet, slab and foundry alloy productions need to be high in purity.

But the world has more aluminum than it needs. The smelters have been forced to commoditize their high-purity aluminum by marketing them as the most universal 99.7% P1020A grade.

One Japanese buyer has recently redefined aluminum in its purchase contract. Previously, it specified aluminum to be LME P1020A specification with maximum 0.2% iron, 0.1% silicon and minimum 99.7% aluminum. The company has revised it to P1010 or 99.8% aluminum with maximum 0.1% iron and 0.1% silicon, as there was no difference in the market value of P1020A and P1010.

In the Japanese market, some imports were labeled as P1020/P1020A guaranteed metal, but were re-sold locally as P1010 or P0610, at same prices.

Japanese market participants estimate over 80% of aluminum imported on term contracts are 99.8-99.85% grades. These 99.85-99.9% grades are limited, comprising only a small percentage out of 1.5 million mt/year imports. The 99.7-99.8% grade is likewise limited, as only two producers are known to be shipping this grade to Japan on a regular basis.

There are mixed views on whether this practice of labeling 99.7-99.9% ingot as P1020A is reasonable and sustainable.

If a producer commits to 99.8% quality guarantee over a long term, the producer should be rewarded with premiums $5-$10/mt higher, some market participants said. There are additional efforts to ensure all ingots are over 99.8%-grade.

Some other producer and trade sources, however, feel that in the supply glut, the market value of a 99.7% and 99.8% aluminum are the same. Only 98.5-99% material clearly trade above 99.7%.

Market participants seem to agree that a 99.9% guaranteed metal would trade at least $10/mt higher than 99.7%, but there is no clear answer as to whether $20/mt or $40/mt is the upper limit.

Chemistry requirement for high purity aluminum varies for each consumer. Generally, low iron content is preferred, but there are aluminum alloys for special construction applications that require higher iron but very low silicon. Some consumers require control over bismuth, lithium and 20 elements that possibly are contained in aluminum ingot.

“There is not enough trade for very high purity material so we follow the P1020 trends,” said one producer of 99.9% ingot.

High purity metal producers have so far defended themselves from the oversupplied market tsunami, by focusing on term businesses and not supplying on a spot basis.

The Q4 Japanese premium negotiations between major producers and Japanese buyers are to start on the week of August 22, amid humidity that makes it feel hotter than it actually is. Some market participants will start discussing 2017 contracts.

Source: http://blogs.platts.com/

Discount Heating Oil Prices is a company where one can find the lowest home heating oil prices. The company also provides delivery assistance to your home punctually and securely. Just visit the official website, enter your zip code, browse the lowest price available on heating oil in your place and click on the “buy now” button. Getting discount heating oil in Massachusetts is now just a click away from you

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s