Japan aluminum premiums will likely rise in the third quarter

SINGAPORE (Dow Jones)--Japan aluminum premiums will likely rise in the third quarter of 2012 as tightening supply and strengthening demand lend support to the physical market, a senior executive at Norsk Hydro ASA (NHY.OS) told Dow Jones Newswires Friday.

Aluminum supply has tightened significantly since the start of the year, partly due to curtailments at high-cost smelters amid sustained low prices, but also due to a resurgence in the popularity of long-term financing deals, which can keep metal off the market for years at a time. The supply squeeze is supporting aluminum futures on the London Metal Exchange and has pushed premiums higher in Asia, Europe and the U.S.

Kjetil Ebbesberg, executive vice president and head of metal markets at the Norwegian aluminum producer, said he's expecting the tightening supply situation to fuel an increase in Japan's third-quarter charges for physical delivery, which will likely settle next month. Second-quarter Japanese premiums stand at $115-127 a metric ton compared with $112-114/ton in the first quarter.

"In Japan, we can confirm that the market is tightening and we do see premiums coming up. The tightness is a result of curtailments and financing deals," he said. He declined to forecast the level at which Japanese premiums would settle.

Warehouse deals became a major feature of the 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 and prices trading in a contango, where forward prices are higher than nearby contracts, the deals have been proving popular since the start of 2012.

Norsk Hydro has become used to the deals as part of the aluminum market, Ebbesberg said.

"It's a combination of the low LME (price), the positive contango and low interest rates...There is money that is looking for assets that are good investments, so it (the presence of financing deals) makes sense in that respect, but we have been a little surprised the level of (financing) activity has not reduced," he said.

Steady demand from the Japanese windows and door frames sector and the transportation sector so far this year is helping reinforce a robust demand outlook for the second half, he noted.

Across the Asian markets, demand from the automotive industry has been strong, he said.

"Overall, automotive has been providing more than its traditional share, and that will be a vehicle for growth," he told Dow Jones. Hydro is expecting global aluminum demand growth of 5% this year, with Chinese growth around 9% and 3% growth in aluminum demand outside China, he added.

In 2011, revenue in Asia represented 17% of Hydro's total revenue, excluding its Australia and New Zealand businesses.

Three-month aluminum is trading at $2,041/ton on the LME, down 0.2% from its previous close and down 13.4% from its 2011 high in February.