Japan's aluminium buyers have agreed to an average 8.5 percent hike in premiums for delivery in April to June, the first rise in three quarters, as a decrease in supply tightened the market while domestic demand showed a moderate pick up.
After a sharp cutback in production capacity by producers, premiums for spot primary aluminium in Asia rose by almost a third early this month compared to the first week of January, traders said.
In Japan, about 80 percent of quarterly primary aluminium deals were set at $121-$122 per tonne over LME cash aluminium prices by the middle of this month, up from around $112 for the current quarter, three traders directly involved in the talks said.
At the top end, an official at one big trading house said on Wednesday it had struck a deal at $127.
Japanese buyers had been reluctant to agree to a large hike on premiums, citing a slow pace of recovery in domestic demand after last year's earthquake and tsunami cooled demand and flooding in Thailand late last year ruptured supply chains of Japanese manufacturers.
"Demand may slightly pick up, but it's hard to call it strong as many manufacturers are fast shifting production abroad," an aluminium parts producer said.
The second-quarter premiums recently agreed ranged from $115 to $127 as initial offers placed by big producers like Rio Tinto Alcan , BHP Billiton and Alcore Inc last month widely differed, from $115 to $132.
The premiums are over the London Metal Exchange cash price, and include insurance and freight costs.
The Japan Aluminium Association said on Wednesday it expects Japan's production of rolled and extruded aluminium products to rise 2.8 percent in the 2012 financial year starting April after an estimated 2.4 percent fall in the current year.
The government's subsidies on sales of environmentally friendly cars and a recovery in housing starts and exports to help propped up domestic aluminium consumption, it said.
Meanwhile, investment funds, banks and large global trading houses were keen to hold aluminium stocks because forward prices were higher than cash prices on the LME, traders said.
Some of these investors bought aluminium ingots directly from global producers and in the spot market in Asia, reducing the amount available in the region, they said.
The large stockpile and the economic slowdown in Europe had hurt aluminium prices, spurring global producers such as Rio Tinto, Alcoa and Norsk Hydro to cut production.
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