Japan Q3 aluminium premiums highest in nearly 4 yrs

TOKYO, June 13 - Japanese premiums for primary aluminium rose about 5 percent to their highest in nearly four years due to concerns over supply shortages, with high prices forcing some buyers to cut term purchases, traders said on Friday.

The premiums for July-September were fixed around $87-$88 a tonne over the London Metal Exchange cash price, including insurance and freight costs, after surging nearly 30 percent to $83 for the April-June period.

Japan is Asia's largest net importer of primary aluminium, with demand estimated at more than 2 million tonnes a year, and the premiums it pays set a benchmark for the rest of Asia.

"We've settled our deals at $87 and $88. The talks dragged on longer because buyers weren't convinced that the market was actually tight now," a Japanese trader said.

"Demand in Japan has been weak and the outlook is also weak," he said.

Many Japanese term buyers, including aluminium mill products makers and trading houses, had sought unchanged or lower levels from the current quarter in view of sluggish demand in Japan.

The trader said higher premiums have forced his company to refrain from term purchases from some producers or take smaller-than-usual volumes for the third quarter.

Metals industry sources have said Japan buys about half of its aluminium through term contracts and imports the rest through its stakes held in overseas development projects.

"In the end, we had little choice but to accept the offer, although we think premiums are too high considering the situation in Japan," said a manager of a Japanese aluminium products maker.

"We've largely agreed our deals around $87," he said.

LOW SUPPLY, LOW STOCKS

The negotiations, which started in the final week of May, turned out to be tough as producers, including Alcoa Inc and BHP Billiton , were asking for higher prices amid supply uncertainty and robust demand in Asia.

The market had forecast only a slight rise in third quarter premiums in view of weak demand, and offers did come down from early levels, when one supplier had offered as high as $93.

But the Japanese premiums may still be too high to attract Chinese buyers, from whom demand is expected to fall in the summer when exports are expected to drop, Chinese traders said.

Producers kept a bullish stance amid an electricity shortage in South Africa and as China continued to tighten controls on exports, with New Zealand reducing supplies since May.

Rio Tinto Ltd/Plc has cut output by 10 percent at its 350,000 tonnes a year Tiwai Point smelter in New Zealand, the country's biggest single power consumer, as a measure to conserve electricity due to low rainfall.

"In a way, it's understandable for sellers to keep their premiums high as there are always concerns about supplies given the situation in South Africa and most lately the production cut in New Zealand," a second trader said.

The supply condition in Japan could easily become tight considering Japanese traders and end-users were avoiding holding large inventories when global prices were high and volatile.

Inventories were also low due to slower domestic demand, mainly caused by sluggish demand in the construction sector, with the weakness now spreading to the auto sector.

Marubeni Corp said on Wednesday inventories held at three major Japanese ports fell 5 percent by the end of May from a month earlier to 196,700 tonnes.

Estimated aluminium inventories at the key ports of Yokohama, Nagoya and Osaka fell about 9 percent from their year-earlier level of 216,100 tonnes.

Source: Reuters