Japan 4th Quarter Aluminum Premiums Higher than the1st Quarter

Fourth-quarter Japan aluminum contract premiums will likely settle higher compared with the third quarter as supply remains tight in Asia due to smelter cutbacks and the movement of metal into long-term financing deals, traders said Monday.

Premiums to London Metal Exchange aluminum prices are expected to settle around $250 a metric ton compared with $200-210/ton for third-quarter contracts, Singapore and Tokyo-based traders told Dow Jones Newswires.

Talks will start in earnest this week and conclude in mid-September, they said. None of the major suppliers to Japan have tabled firm offers yet, but producers are expected to open negotiations with offers no lower than $250/ton, the traders said.

"I wouldn't be surprised by a premium of $250/ton," a Tokyo-based trader said.

Some producers will have less metal to offer Japanese customers after cutting production due to low LME prices and weak market conditions, the traders said.

Japanese aluminum buyers will be paying more to secure aluminum despite little improvement in demand in the last three months, a second Tokyo-based trader said.

"Automotive production is expected to reduce in October, the construction sector is pretty steady and electronics is very weak."

However, he said, premiums will be higher due to the continuing popularity of long-term financing deals, which can keep aluminum off the market for years at a time.

Financing deals became a major feature of the aluminum market when demand fell during the 2008-2009 financial crisis. Producers struck deals with investors, traders and banks by pledging metal to raise cash.

With aluminum demand weak in many key consuming regions, storage costs low due to low interest rates and forward LME prices trading at a premium to prompt contracts, such deals are gaining in popularity.

A high level of LME canceled warrants--a proxy for metal about to leave warehouses--signals that hundreds of thousands of tons of aluminum may move into financing deals over the coming months.

Canceled warrants totaled 35.19% of total stock Friday compared with 13.33% of stock at the start of the year. LME stocks in all locations total about 4.91 million tons.

Three-month aluminum hasn't traded Monday due to a U.K. holiday. It closed at $1,918/ton Friday, up 0.1% from its previous settlement but 18.7% lower than its 2012 high of $2,361.50/ton reached March 2.