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Japan Aluminum Premium Plunges Most in Five Years

Thursday, Sep 11, 2008
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Sept. 11 (Bloomberg) -- Aluminum producers will cut the fee they charge buyers in Japan, Asia's biggest importer, by as much as 14 percent, the biggest drop in five years, as a slump in home and car sales slows demand. The premium, a regional benchmark, will be $75-$77 a metric ton over the London Metal Exchange cash price for the three months to Dec. 31, down from $87 in the current quarter, a four- year high, according to four executives involved in the talks. They declined to be identified as the negotiations were private. The drop in the Japanese premium is the first in a year and the biggest since the October-December quarter of 2003, reducing costs for aluminum rolling mills such as Kobe Steel Ltd. The decline may curb revenue at producers such as BHP Billiton Ltd., the world's largest mining company, which is bidding for Rio Tinto Group, the second-largest aluminum producer. ``The plunge reflected deteriorating demand,'' Kunio Ishikawa, director at the Japan Aluminium Association, said by telephone. ``Nobody in our group has an optimistic view that a recovery will come within the next six months.'' Japan's output of rolled-aluminum products decreased 1.4 percent to 1.36 million tons in the seven months ended July 31 from a year earlier, while shipments dropped 0.9 percent. Shipments fell as demand from builders, the largest consumer of aluminum products, dropped because of a slump in the property market and stricter building approval regulations introduced by the government last year, said Ishikawa of the aluminum association. The construction industry represented 24 percent of overall consumption in the period. Can Demand Demand from can makers, which make up 19 percent of total consumption, weakened as beer brewers increased prices of the alcohol to pass on raw material costs, leading to a drop in sales. Wet weather in the summer curbed beverage consumption and can shipments, Ishikawa said. Demand from the car industry, which grew 4.6 percent in the seven months, began falling as Toyota Motor Corp., Japan's biggest maker, and rivals cut output as higher fuel costs slowed sales, he said. Japanese trading companies and aluminum mills buy the metal under term contracts with producers such as BHP Billiton and Rio Tinto. The premium applies to so-called Good Western-grade ingot imported for processing in Japan and includes the costs of insurance and shipping. The amount is levied on top of the price of aluminum for immediate delivery on the London exchange. Aluminum Drop Aluminum for delivery in three months has lost 22 percent from a record high of $3,380.15 set on July 11 as economies slowed in the U.S., Europe and Japan. The price has still gained 9 percent this year, outperforming commodities such as nickel, as power shortages from China to South Africa curbed output. Metal for immediate delivery in London added 1 percent to $2,578.25 a ton yesterday. Producers raised the Japanese premium in July-September for a second quarter, regardless of weakening aluminum demand, as power shortages in China, New Zealand and South Africa forced smelters to cut output, leading to a drop in shipments to Asia. Rio Tinto reduced output at the Tiwai Point smelter, which produces 350,000 tons a year, in May to conserve dwindling hydroelectric reserves. The plant is owned 79 percent by Rio Tinto and 21 percent by Sumitomo Chemical Co. The production cut could reduce aluminum shipments from the smelter to Sumitomo Chemical by more than 7,000 tons a year, according to Hironori Mizushima, a spokesman for the Tokyo-based maker of chemical products. It remains unclear when the smelter will restore production, he said. Emma Meade, spokeswoman for Melbourne-based BHP, said she could not comment on the premiums. Diane Collier, a spokeswoman for Rio in Brisbane, where the company's Australian aluminum division is based, could not be reached when telephoned.

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