December 29, 2022

At least one major Japanese aluminum consumer has agreed to pay a $86/mt premium for 1Q 2023 deliveries, according to Bloomberg. AEGIS notes that this $86/mt premium is the lowest in two years and is down from initial offers of $95/mt from earlier this month. This is the premium over the London Metal Exchange (LME) cash price that Japanese importers agree to pay for primary aluminum shipments. These premiums, which are set on a quarterly basis, are negotiated directly between Japanese end-users and global aluminum producers. This premium has dropped in recent quarters as demand, specifically from the automotive sector, has softened, according to Bloomberg.  Japan imported approximately 2.793 million mt of aluminum in 2021, or about 4% of global production, according to the Japan Ministry of Finance and USGS data. (Sources: Bloomberg, Japan Ministry of Finance, USGS)

US aluminum consumers should closely watch Japanese import premiums because weakening premiums could foretell softening global demand. As we noted above, Japanese import premiums (over LME) are dropping, signaling that manufacturers are turning away the supply of metal. This shift in demand is likely to send the metal to other major aluminum importers. As aluminum shipments are rerouted, the immediate result could be lower premiums in North America, represented most commonly by MWP. More broadly, AEGIS wonders if these declining premiums are a sign that the market remains oversupplied. Consumers looking to hedge aluminum may wish to elect hedging structures tailored to participate in lower prices while protecting against higher prices. One popular way of hedging LME aluminum is with zero-cost (or "costless") collars, and we would love to talk you through those strategies.

As for the Midwest Premium, this market can be hedged via CME MWP swaps. Like the Japanese import premium, the CME MWP has also fallen in recent months. Please note that there is no options market for the CME MWP. The CME Midwest Premium swap market is thinly traded, so hedging in that market is tricky. Thus, we recommend using limit orders. Again, please contact AEGIS for specific strategies that fit your operations. (12/29/2022)

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