Aluminum Premiums for Japan Reach Record on Supply Curbs

Aluminum buyers in Japan, Asia’s biggest importer, agreed to pay record premiums over the benchmark prices in London for a second straight quarter after suppliers deepened output cuts, said three industry executives.

Premiums for the three months starting October were set at $253 to $255 a metric ton over the London Metal Exchange’s cash price, compared with $200 to $210 a ton this quarter, according to the executives involved in the negotiations. They declined to be identified because the fee hasn’t been publicly announced.

Premiums more than doubled this year, adding to costs for Japanese fabricators such as Furukawa-Sky Aluminum Corp., the largest mill. Fees in Europe and the U.S. also surged to records as financing deals tying up inventories keep buyers waiting for deliveries. United Co. Rusal, the world’s biggest maker, expects global producers to cut about 4.5 million tons, or 8.7 percent of capacity, before the end of 2012.

“Record premiums may prevent smelters from reducing output further even as prices in London stay weak,” said Naohiro Niimura, a partner at research company Market Risk Advisory in Tokyo. “The global aluminum market will probably have about 600,000 tons of surplus next year, unchanged from this year.”

Supply to Asian buyers fell this quarter as production was disrupted at the Sohar smelter in Oman and as Norsk Hydro ASA, Europe’s third-largest maker, closed its 180,000 ton-capacity Kurri Kurri smelter in Australia. World output averaged 67,400 tons a day in July, excluding China, dropping from 67,700 tons in June, according to the International Aluminium Institute.

BHP, Alcoa

The premium is applied to so-called Good Western-grade aluminum ingot, and includes freight and insurance costs. Furukawa-Sky’s spokesman Ryu Sawachi said he couldn’t confirm the premium. The biggest suppliers to Japan include Rio Tinto Group, BHP Billiton Ltd. and Alcoa Inc.

Aluminum for delivery in three months on the LME fell 0.9 percent to $2,148 a ton at 2:45 p.m. in Tokyo today. The metal has gained 6.4 percent this year.

Buyers face higher costs even as demand has halted in Japan. Shipments of rolled-aluminum products by Japanese fabricators declined 0.8 percent in June, the first drop in five months, before gaining 0.7 percent in July as Europe’s debt crisis slowed global growth and curbed exports.

Shipments may decline further as demand from carmakers is expected to weaken, said Koji Iida, head of statistics at the Japan Aluminium Association. The government’s program of paying subsidies to buyers of fuel-efficient models, which boosted vehicle sales in Japan by 53 percent in the first seven months, is about to end. Sales will drop as much as 20 percent next quarter because of the expiration, according to analysts at BNP Paribas and IHS Automotive.

Warehouse Financing

In Europe and North America, premiums paid for aluminum are set to extend gains to records in 12 months, according to a Bloomberg survey of traders and analysts. The metal is withdrawn from the physical market into warehouse financing.

The fee in Rotterdam, excluding duties, will rise 17 percent to about $240 a ton on top of the price of aluminum for immediate delivery on the LME, according to the median estimate of 11 traders and analysts surveyed by Bloomberg. The U.S. Midwest premium will climb 20 percent to about 13 cents a pound ($287 a ton), according to the same survey.

A financing transaction involves a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery dates trade at higher prices than nearer-dated metal. Low interest rates help make the accords profitable.

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