Japan aluminium buyers offered three figure premiums

TOKYO, Sept 2 (Reuters) - Japanese buyers face the prospect of having to pay a three figure premium for primary aluminium ingots for the fourth quarter, the highest in 14 years, despite low domestic demand. Producers' initial offers were at around $120 to $130 over the London Metal Exchange cash price including insurance and freight costs, although they have since been lowered to below $120 per tonne, traders said. Reuters data shows that premiums last topped $100 in 1995. Japanese buyers are finding it hard to swallow the level, however, as it represents a hike of over 30 percent from Q3 when the premium was mostly agreed at $75 per tonne. "If you only take into account the Japanese market, it's a puzzling figure ... but it's not possible to limit our discussion to the situation in Japan," said a buyer with a Japanese end user. There is understood to be solid demand for the metal in Asia. Metal industry officials said domestic supplies were tight after months of aggressively using up stocks, but demand at home remains weak compared to year-earlier levels. Japan's demand for aluminium slumped dramatically from late last year as auto makers and other major manufacturers were forced to cut production as they struggled to try to weather the worst global economic downturn in decades. A second official with an end user said: "We may have worked too hard at using up stocks, but that seemed the only alternative at the time as we faced a mountain of stocks and sharply shrinking demand." Aluminium stocks held at key Japanese ports plunged to 174,200 tonnes at the end of July, the lowest since records started to be kept 14 years ago, trading house Marubeni Corp said last month. [ID:nT19390] Japanese end-users say they must now replenish depleted stocks. "I guess it should come as no surprise if producers try to take advantage of our weakness (low stocks)," the second official said. There are signs that aluminium demand is returning but only slowly. The latest data shows Japanese aluminium product shipments in July rose 5 percent from the previous month, the fifth straight monthly increase, but they remain down nearly 20 percent from a year earlier underscoring the fragility of the recovery. [ID:nSP499738] The supply picture has been complicated by whether Russia's UC RUSAL, the world's largest aluminium producer, would be providing supplies to Japan in Q4. In the previous round of negotiations, news that Rusal had told Japanese customers that it had no supplies to offer in Q3, shocked buyers into accepting a 30 percent hike from producers in a desperate bid to secure supplies. Some Japanese buyers said that Rusal did, in fact, provide aluminium supplies in Q3 to long-term contract holders. Rusal has said that it will supply aluminium to Japan in October-December, although Japanese buyers remain cautious, and some say that their buying programme for Q4 is based on the possibility that there will be no supplies from the firm. Some traders were also concerned that South Korea's tender seeking to buy 6,000 tonnes of primary aluminium ingot might have a bullish influence on the premium negotiations, although others said they were not worried. [ID:nSEO305683] The tender, issued last week, closes on Friday. (Reporting by Miho Yoshikawa; Editing by Joseph Radford)