Japan Aluminium Premiums are likely to remain high and add to inflation

Industry insiders predict that Japan's bargaining strength in quarterly premium negotiations for aluminium will continue to erode due to the slowdown in imports of primary alloys, and because Japanese companies have divested their overseas smelters.

This could result in higher import premiums. It would also add pressure to an already stressed economy, which is already suffering from inflation, rising rates of interest and a weakening yen, while undermining the competitiveness for key industries like automobiles. Junya HOSaka, leader of Sumitomo Corp's light metals trading group, explained that this situation was likely to occur.

According to the latest Bank of Japan data, the inflation rate for goods traded by companies in January rose 4.2% annually, while the prices of non-ferrous materials, such as aluminium, increased at a rate of 14.3%. This will lead to higher prices in the domestic market for consumer goods such as cars, cans and other consumer products.

Japan is Asia's largest importer of light metals and the premiums that it pays over the London Metal Exchange Cash price each quarter sets the benchmark for Asian buyers. Global suppliers are watching Asia's premiums closely as they can influence metal flows.

Japan's influence on price negotiations has diminished as primary aluminum imports have almost halved in the last two decades due to a weakening of domestic demand. This has caused producers to prioritize the interests higher volume buyers.

The decline in imports, and the withdrawal of Japanese companies from overseas aluminium melting, have changed the power balance. This has weakened the bargaining power of Japanese buyers and increased the market's sensitivities to premiums elsewhere, said Eisuke Akasaka, the general manager for Marubeni's light metals division, a major Japanese aluminum trader.

Government data shows that in 2024, Japan will import 1.05 million metric tonnes of primary aluminum, almost the same as the 1.03 millions tons imported in 2023. This was the lowest level in more than 20 years.

Recent drops in demand are due to a combination of factors, including a decline in automakers' demand and fewer construction projects using resin window sashes for thermal insulation.

The current quarter's import premiums were $228 per ton. This is the highest level since 2015, and two-and-a half times higher than the previous year. Marubeni forecasts that Japan premiums for the remainder of 2025 will remain in a range between $200 and $300, while Sumitomo predicts a 200 to $260 range.

Sumitomo's data shows that Japan's equity-based offtake volume has decreased to 750,000 tonnes in 2024, from 1.1 millions tons in 2012.

Sumitomo Chemical has sold to Rio Tinto a stake of 20,64% in New Zealand Aluminium Smelters and a stake of 2,46% in Australia's Boyne Smelters. Mitsubishi Corp sold its 11,65% stake in Boyne Smelters to Rio Tinto.

Hosaka, Sumitomo, said that with falling equity stakes there was a risk Japan would not be able secure the volumes they want, as producers may divert shipments into more expensive regions, such as North America.

The traders warn that President Donald Trump’s 25% tariff on U.S. aluminum imports may increase volatility on the market. They also say that changing metal flows due to negotiations between the U.S.

Hosaka stated that the U.S. tariffs will likely make global aluminum flows inefficient, and increase costs and premiums.

Trump is considering a waiver of tariffs for Australian imports. This could mean that the country's shipments will go to North America, while Canadian metals are moved to Europe in order to avoid the U.S. levies, Marubeni’s Akasaka stated.

He said that this could have an impact on Japan's supply, as Australia is the country's main supplier.

(source: Reuters)