Tokyo (Platts)--17Oct2012/534 am EDT/934 GMT

The spat between Japan and China over the East China Sea islands was hurting both countries' economies, and the effects of this dispute has begun to trickle down to impact various industrial sectors, including the aluminum market, industry sources said this week.

The declining sales of Japanese cars and electronic appliances in China were affecting Japanese manufacturers, the Chinese metal suppliers and others down the supply chain.

The current slowdown in Japanese car sales in China has lowered demand for ADC12 aluminum alloy, which is used for car engines.

A diecaster in Japan said Japanese automakers' China output over October-November was roughly half of planned levels. "Most have not decided for December. They are monitoring the sales trends and signs change everyday," he said. While most Japanese diecasters in China are seeing a sharp fall in orders like the automakers, his company was less affected as its Chinese plant exports to Japan.

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The slowing car sales in China affected diecasters in Japan as they export components to China. They see a 10%-30% cut in demand from before the spat, while waiting for more elaborate data from the automakers.

"It is not just the China impact, but slowing car sales in Japan [due to the end of the government subsidies for fuel-efficient car purchases in September] and declining consumer spending [worldwide]," have impacted Japanese diecasters, added a secondary aluminum smelter.

ADC12 PRICES DROP

The spot price of ADC12 -- used for diecasting -- exported from China has dropped since end September, and Japanese traders and Chinese producers both cited slow demand. Chinese ADC12 accounts for roughly 30% of Japanese consumption.

One diecaster said his company started to test European ADC12 supplies as it was risky to depend on one country for imports.

Platts assessed the spot ADC12 export price at $2,140-2,180/mt FOB China on October 16, down from $2,160-2,180/mt FOB China on September 18, three days after protesters set fire to Japanese car showrooms at Jindao.

Import prices are pressured lower as they compete with Japan's domestic ADC12 supplies that account for around half of the country's demand, said one Japanese trader. "Domestic prices are around Yen 180/kg [equivalent to $2,150/mt CIF excluding local freight costs] and my customers are taking it easy. They can buy any time, there is plenty of supplies," he said.

ADC12 alloy contains up to 12% silicon, which Japanese smelters import from China as there is no local production.

A silicon metal trader said order volumes for 98.5%-553 grade silicon were down by around 10% from his previous expectation. "Smelters want to keep stocks as low as possible, as they don't know what to expect," he said.

The spot price of 98.5%-553 grade silicon metal imported into Japan was up to $2,000-2,040/mt CIF Japan on October 11, from $1,970-2,020/mt CIF on September 20. The price was up reflecting the anticipated higher power costs with the winter season approaching, but demand was sluggish, sources said.

"Price climbs up when buyers come into the market, and falls when they go away. Offers below $2,000/mt are there again," said a secondary aluminum smelter source on October 16.

CHINESE SECONDARY ALUMINUM SMELTERS HIT

Dwindling ADC12 alloy demand in Japan is seen to hit Chinese secondary aluminum smelters and silicon metal producers focused on sales to Japan, sources said.

"The smelters have been operating in a difficult environment since the 2008 global financial crisis and the middle-sized 5,000 mt/month smelters are discussing whether they should be in this business next year or not," said a Tokyo trader.

Some Chinese smelters were sourcing aluminum scrap from Japan.

In September, two of the largest scrap aluminum exporters in Japan, FE Material and Yoshinaka Shoji, closed down due to faltering demand in China.

The latest spat was unlike the 2010 island dispute when a Chinese fishing boat captain was arrested by the Japanese authority September 7, after colliding with a Japanese coastguard vessel. That dispute resulted in China restricting exports of rare earth and other metal resources to Japan, leading to a rise in metal prices. Toyota and other automakers had continued normal operations in China amid the 2010 spat.

The spot export price of Chinese ADC12 moved up to $2,180-2,200/mt FOB China on September 28, 2010, from $2,140-2,160/mt on September 7, 2010.

The spot price of silicon metal imported into Japan climbed to $2,500-2,520/mt CIF Japan on September 30, 2010, from $2,250-2,300/mt CIF Japan on September 3, 2010, on fear of a supply shortage.

But metal trade and prices stabilized in 2011. Metal buyers were able to pass on higher costs to their product prices. Market demand was healthy and companies did not suffer major losses in revenue as a direct result of the spat.

--Mayumi Watanabe, mayumi_watanabe@platts.com
--Edited by Geetha Narayanasamy, geetha_narayanasamy@platts.com

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