UPDATE: Japan 3Q Aluminum Premiums Likely To Jump 25%-Traders

SINGAPORE (Dow Jones)--Japanese aluminum premiums for the third quarter of 2009 look likely to be settled around 25% higher than those for the second quarter, traders said Wednesday. Producers are asking for $75 over the cash London Metal Exchange price, with consumers expected to eventually settle above $70, according to aluminum traders in major Japanese metals houses. Most traders expect the higher end of the $70 to $75 range, but as no contracts have been signed yet, the level can't be confirmed. This compares with settlements of as low as $57 to $58 in the second quarter, when destocking by major consumers including the auto industry was in full swing. The negotiations are expected to be concluded before the end of next week. "In general, the feeling is getting more optimistic," said a trading manager at an agent company of a major global supplier. "It's certain the range (of premium settlements) will be much higher than in 2Q." Contracts could even exceed $75, with negotiations being affected by a rumor that supplies from Russia to Japan will be restricted in the third quarter, another trader said. Since the second-quarter premiums were negotiated in March, major consumers including the auto industry have entered a mild restocking phase, and beverage can demand is high, while available stocks are in a downtrend due to lower imports in the second quarter and exports to China, traders said. At the end of April, aluminum stocks at Japanese ports totaled 295,600 metric tons, down 12.7% on month. The combination of lower stockpiles and recovering demand will result in contracted volumes rising in this round of negotiations, making it easier for global aluminum producers like Rio Tinto Alcan to demand higher premiums. Japanese premiums for good western brand aluminum, which are set on a quarterly basis, have been traditionally regarded as a benchmark for major industrial consumers in the Asian region. Signs of tightness in the physical aluminum market aren't confined to Japan with aluminum warrants in Singapore at premiums of $85 per ton, a higher level than what would be expected given the rapid rise in inventories in 2009. Total LME inventories are up over 80% since the start of the year to 4,242,475 tons, with 507,000 tons of that in Singapore. Local physical traders say much of it is tied to financing deals, which would explain the elevated premiums, which were around $30 back in January, despite Singapore warehouse stocks increasing by around 40% since then. On May 21, South Korea's state public procurement service canceled a 5,000 tons tender for good western aluminum as premiums offered were considered too high - somewhere beyond the $100 level. Last week, Indian aluminum producer National Aluminum Co. Ltd.(532234.BY) sold 3,000 metric tons of aluminum at a premium of $69 to Japan's Sumitomo Corp. (8053.TO), only slightly below the level anticipated for the Japan third quarter western brand premiums. Despite these positive indications on the ground, analysts remain mostly bearish on the metal with many of the view that inventory levels remain a massive overhang, while more production cuts are needed. Of particular concern is the reported restart of idled aluminum production capacity in China where more than 1 million tons of annual capacity is believed to be coming back on stream in response to higher prices. The Shanghai Futures Exchange benchmark September aluminum contract, taking into account VAT, is at a premium of around $100 over the equivalent LME contract, a factor which has supported LME prices in recent sessions. At 0730 GMT, LME three-month aluminum was at $1,493.25 a metric ton, up $22.25 since Tuesday's kerb.