Japan eyes near 20 pct cut in Q1 aluminium premiums

* Battle lines seen drawn near $60 for Q1 term premiums * Industry sources view it as a buyer's market * Economic downturn hits car sales, cuts metal consumption TOKYO, Nov 28 (Reuters) - Japanese buyers will press for a cut of close to 20 percent in the premium for January-March 2009 primary aluminium supplies, citing the severe economic downturn that has cut demand for the metal used in automobiles. The battle lines are being drawn near $60 per tonne for the term price, compared with the $75-$76 premium for the October-December quarter, industry sources say. Announcements of production cuts by leading automobile producers have weighed on sentiment, leading to the widely held view that it is a buyer's market. Industry sources said that Japanese end-users were eager to settle below $60 while offers by producers stand around $65 at initial stages of talks, which began this week. "I think there is a worry, a fear if you will, among many people that things might get even worse," a Japanese official with a leading firm involved in the talks said. Japan's domestic demand for aluminium in 2008 is expected to fall 0.5 percent to about 4.2 million tonnes, the second year of decline in a row, figures provided by Marubeni Corp (8002.T: Quote, Profile, Research, Stock Buzz) show. The outlook for next year is even more bleak. On top of stricter building rules introduced in 2007 after an industry scandal, aluminium demand was dealt a further blow as the financial crisis took a toll on the broader economy. The sharp global economic downturn has forced top automakers including Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) to cut production to prevent inventories from ballooning further as sales sagged in major markets, leading to a reduction in metal consumption. Japanese industrial production dropped sharply in October and manufacturers are warning of record falls in coming months, prompting warnings that growing global gloom means Japan's recession will be deep and long. [ID:nT133784] OUTLOOK UNKNOWN? Plunging demand has raised questions about how much aluminium will be needed in 2009, a topic that is typically discussed during negotiations for the first quarter. "Just speaking for ourselves, it's very difficult to tell how much we are going to need," a Japanese end-user official said. He said that his company was thinking of reducing term volumes in 2009 by as much as 10-20 percent compared with 2008. End-users were particularly bearish in their outlook, and at least one firm said that a premium of $55 over the London Metal Exchange cash price, including insurance and freight costs, was an accurate reflection of the current market. Some industry sources believe more supply will flood the market, adding to the glut. Export orders from the United States and Europe have tumbled since October, while large stocks are hanging over the market. Some estimates put stocks in China, the world's largest producer, at over one million tonnes, while London Metal Exchange stocks at just below 1.8 million tonnes are near their highest since December 1994. Moreover, Asian buyers have delayed quarterly shipments for November-December delivery to the first quarter of next year, and this is likely to make them reluctant to accept more metal for that period, adding to the downward pressure on premiums. In a recent development, there was talk that buyers in Asia have returned to the spot market after a virtual halt in buying in October and much of November. This could provide one of the few factors to support producers' premiums, industry sources say. Term premiums for the current quarter fell for the first time since the fourth quarter 2007, tumbling 14 percent from the July-September quarter where premiums were mostly settled at a four-year high of $87-$88. Some buyers said the cuts for the current quarter had not been adequate, given demand which was already poor then. Japan is Asia's largest net importer of primary aluminium, with demand estimated at around 2 million tonnes a year. Current premiums negotiations for the first quarter between Japanese trading houses and aluminium mills with suppliers such as mining giants, BHP Billiton and Alcoa Inc are likely to be concluded by mid-December.