UPDATE 1-One Japan Q4 Aluminium Premium Deal at $118/T-Trader

TOKYO, Sept. 8 -- At least one deal on term premiums for primary aluminium shipments to Japan for October-December has been agreed at $118 per tonne, down about 1.7 percent from $120 in the third quarter, a trader said on Wednesday.

"We have partially settled at $118 per tonne," the trader said, adding that talks were ongoing on other deals.

Other traders said they were seeing offers at $118, with some suppliers seen lowering their offers to around $116-$117.

The $118 level would be the third quarterly drop in a row and the lowest since the $115-$120 set in the fourth quarter of 2009, when strong demand from China and Russian supply concerns raised premiums sharply from $75 in July-September 2009.

Japanese traders had expected a further reduction in fourth-quarter premiums due to a cautious outlook on demand, with forecasts ranging between $110 and $120. But they had also expected the drop to be limited as suppliers kept citing the material's tightness and higher premiums outside Asia.

"We started from $120 and offers have come down by several dollars," said another trader. "Where we would really like to settle is below $110 which we believe reflects fundamentals, but I would think $110-$115 would be the best we could hope for."

He said demand for aluminium in the second half of fiscal 2010/11 was likely to be slack as the government ends its subsidy for purchases of environmentally friendly automobiles, the construction sector shows no signs of recovery and the use of aluminium cans is not growing as strongly as expected.

Japan's economy has been hit by the yen's rise to a 15-year high against the dollar and strong deflationary pressure, weighing on demand for aluminium, which is widely used in products ranging from computers and electronics to the food sector.

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.

Premiums, which are over the London Metal Exchange cash price, and include insurance and freight costs, have been falling after settling at historic highs of $128-$130 in January-March.

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 have said.

Aluminium term talks started in the week of Aug. 23 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.