Japan aluminium buyers eye sharply lower premiums

Japanese aluminium buyers look set to cut volumes and seek much lower premiums in talks with suppliers for the fourth quarter, as demand weakens amid slower car sales and uncertainty over the health of the global economy. But producers, such as mining giants Alcoa Inc and BHP Billiton, are not likely to give in easily as demand for primary ingots may rise if Chinese exports of alloys drop on a possible new export tax. Primary buyers, which include trading houses and aluminium mills, are hoping premiums will reflect recent falls in spot premiums in Asia and rapidly deteriorating demand in Japan, as well as in other areas of Asia. "We'll have to cut our volume unless premiums fall sharply from here. We have little choice as demand is weakening rapidly," said a manager at a Japanese aluminium products maker. "We are very worried that demand could fall even further in the fourth quarter," he said. Carmakers like Toyota Motor Corp have cut production plans on slowing demand in the United States and other major markets, while demand from Japan's construction sector has been hit by tighter building rules and an economic slowdown. "Buyers accepted higher premiums in the third quarter, but we were all disappointed," said a trader at a products maker. "We are planning to cut our purchases," he said. Until recently, supply concerns and robust demand had sent Japanese premiums of good Western aluminium higher. Japanese term premiums, the benchmark for the rest of Asia, are currently about 35 percent higher than levels at the start of the year and reached a four-year high of $87-88 per tonne over cash London Metal Exchange prices for the July-September quarter. The manager at the Japanese aluminium products maker said his company would ask for premiums of around $70 a tonne or even less. SUPPLY CONCERNS Producers are scheduled to provide initial offers to buyers when negotiations begin next week in Japan. Japan is Asia's largest net importer of primary aluminium, with demand estimated at more than 2 million tonnes a year. But traders were unsure if large cuts of around 20 percent were in store. "Demand for primary ingots in the Asian region could increase if the availability of Chinese alloys actually falls. This could be a factor keeping premiums near $80," a Japanese trader said. Beijing is considering imposing a 5 percent tax on aluminium alloy exports as early as September, which would increase metal supplies in China but cut availability in Asia. That may force overseas buyers to liquidate short positions on the LME, pushing up LME aluminium prices. Supply concerns also linger. In New Zealand, Rio Tinto Ltd/Plc has cut output at its 350,000 tonnes per year Tiwai Point smelter by 10 percent since May, as hydroelectric power levels in the southern part of the country have not fully recovered, industry sources said. In South Africa, electricity shortages are also of concern. "Suppliers have also been hit by higher production costs as the rise in oil has pushed up electricity bills, which may make it difficult for them to cut premiums sharply," the trader said. --Reuters