Aluminum Fee to Japan Said Cut by Most in Two Years on Glut

Aluminum buyers in Japan, Asia’s largest importer, secured a 5 percent cut in premiums charged by producers, the largest reduction in two years, as demand weakened, said three executives involved in the negotiations.

Premiums for the three months ending March 31 were set at $112 a metric ton over the London Metal Exchange cash price in transactions agreed so far, compared with $118 this quarter, the executives said, declining to be identified because the talks were private. Buyers pay a premium in addition to the LME cash price to cover freight and insurance and to reflect regional supply and demand.

The fee declined as Europe’s sovereign-debt crisis, the yen’s rally to a postwar record against the dollar and Thailand’s worst flooding in almost 70 years that cut automobile production threaten Japan’s recovery from a record earthquake and tsunami. The drop in premiums may reduce costs for fabricators such as Furukawa-Sky Aluminum Corp. (5741) and Sumitomo Light Metal Industries Ltd. (5738), Japan’s two biggest mills.

“Global aluminum demand may fall short of production by about 1 million tons next year,” said Naohiro Niimura, a partner at research company Market Risk Advisory in Tokyo. “Consumption is not growing much because of the European woes, and it will remain weak during the first quarter.”

Furukawa, Sumitomo

The fee declined for a second-straight quarter to the lowest level since the first quarter of this year, when Japanese premiums were set at $112 to $113 a ton. It was the largest reduction since the second quarter of 2010, when fees were cut by as much as 6 percent. The first contraction in two years of China’s manufacturing signaled a slowdown in demand from the largest consumer, adding to a global glut of the light metal.

Furukawa Sky spokesman Ryu Sawachi said he couldn’t confirm the premium. Sumitomo Light Metal spokesman Kozo Yamazaki also couldn’t confirm the fee.

A surplus in the world aluminum market may widen from 800,000 tons estimated for this year, according to Niimura. European economies are contracting as the sovereign-debt crisis spurred governments to cut fiscal spending, while financial market turmoil curbed bank lending, he said.

Japan’s shipments of rolled-aluminum products dropped 2.8 percent in October, the fifth-straight month of decline, as exports to China and Southeast Asian markets weakened, according to the Japan Aluminium Association.

Shipments may keep decreasing as the automakers’ efforts to restore production from the March quake were hampered by Thailand’s flooding, said Koji Iida, head of statistics at the association. Toyota Motor Corp. (7203), Asia’s largest carmaker, said its production was reduced by 215,000 vehicles from Oct. 10 to Nov. 25 because of the Thai disaster.

‘Deteriorating’

“The situation surrounding our industry is deteriorating,” Iida said in a telephone interview. “Given a very unclear outlook for the global economy, companies are becoming increasingly cautious about raw-material purchases.”

Aluminum stockpiles at ports in Yokohama, Nagoya and Osaka increased 1.9 percent to 235,800 tons at the end of October, the highest level since August when inventories swelled to a two- year high, reflecting a slowdown in demand.

Japan’s rebound from the disaster showed signs of waning as exports slid in October and the unemployment rate rose. Panasonic Corp. (6752) and TDK Corp. (6762) are cutting jobs as the strong yen erodes profits.

Imports of refined aluminum decreased 11 percent to 1.2 million tons in the nine months ended Sept. 30 from a year earlier, data compiled by the aluminum association showed.

Aluminum on the LME declined 0.5 percent to $2,119 a ton at 11:42 a.m. in Tokyo. It fell 24 percent after reaching $2,803 on May 3, the highest level since 2008.

Some first-quarter transactions are still being negotiated with offers as high as $115 a ton, the executives said. The fee is applied to so-called Good Western-grade aluminum ingot. The biggest suppliers of Western ingot to Japan include Rio Tinto Plc (RIO), BHP Billiton Ltd. and Alcoa Inc. (AA)

To contact the reporter on this story: Aya Takada in Tokyo at atakada2@bloomberg.net

To contact the editor responsible for this story: Richard Dobson at rdobson4@bloomberg.net

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