TOKYO, Aug. 23 -- Buyers are hoping for a further cut in premiums for primary aluminium shipments to Japan in the fourth quarter, but suppliers may again prevent a sharp drop, citing the material's tightness and higher premiums outside Asia.

Aluminium term talks started this week between suppliers, including mining giants such as BHP Billiton (BHP.AX: Quote)(BLT.L: Quote) and Alcoa Inc (AA.N: Quote), and Japanese buyers such as trading houses and aluminium mills.

"Our stance is unchanged from before in seeking a cut, because premiums are still historically high," said an end-user in Japan. "We hoped for premiums below $120 in the third quarter and would like to see them closer to $110 in the fourth quarter."

Term premiums for shipments in July-September were mostly agreed at $120 per tonne, down from $122-$124 per tonne in the April-June period, the second quarterly drop in a row, falling from historic highs of $128-$130 in the first quarter.

Traders' forecast for Q4 premiums ranged between $110 and $120.

Demand for aluminium, widely used in products ranging from computers and electronics to the food sector, is expected to slacken later in the year as the yen's rise to a 15-year high against the dollar and strong deflationary pressures hit Japan's economy.

The scheduled end to the government subsidy for purchases of environmentally friendly automobiles at the end of September is also expected to result in the reduction of automobile output.

"Weaker demand from end-users on economic worries will help push down premiums," said a trader at a Japanese end-user.

"While U.S. and European premiums appear to be peaking out, there is also no strong reason for a sharp cut in Q4. So, I see $115, a recent low in spot premiums, as one key target," he said.

The premiums are over the London Metal Exchange cash price, and include insurance and freight costs.

South Korea said on Monday it had bought 3,000 tonnes of primary aluminium ingot for October shipping at a premium of $113. 

DISTORTED SUPPLIES

Despite the market overall being flooded with excess material, worries about tight aluminium supplies persist, supporting suppliers' desire to keep premiums high, Japanese industry officials said.

Financing deals have tied up about 70 percent of LME aluminium stocks, preventing supplies from hitting the market, despite LME warehouse inventories hovering near record highs. MAL-STOCKS

Plans to launch physically backed aluminium exchange-traded products are also expected to take material out of the market.

Worries about supplies from the Middle East have added to bearish sentiment, although Japanese traders said their purchases from the region were limited and unlikely to have any big impact.

Norwegian aluminium producer Norsk Hydro (NHY.OL: Quote) said this month it had declared force majeure for aluminium deliveries from its Qatalum smelter in Qatar after a power failure delayed the plant's ramp-up schedule.

Qatalum's supply concerns have pushed up spot primary aluminium premiums about $10 in Asia to around $120 per tonne for good Western metal, the benchmark grades for premiums in Asia, traders said.

"Many people are holding onto physical metal and are trying to push up premiums after the Qatalum shutdown," said a supplier. "We are already asking over $120 for Q4 shipments."

A trader whose firm sells aluminium to China and uses the metal to make products said, "We have already received some offers at $120 for Q4 deliveries."

Japan imports about 2 million tonnes of primary aluminium every year. End-July aluminium stocks at key ports were at a reasonable level of 208,200 tonnes.

"It could be that premiums stay sideways around $120," another Japanese end-user said.