TOKYO, Sept. 14 -- Term premiums for primary aluminium shipments to Japan for October-December were mostly set at $116-$118 per tonne, the lowest since the fourth quarter in 2009 and marking the third straight quarter of declines.

The level represents a drop from $120 settled for the third quarter and marks a decrease of about 8 percent from historic highs of $128-$130 in January-March.

Traders said there were slightly more premiums settled at $116 than $118, suggesting that Japanese buyers managed to settle their deals at the lower end of ranges forecast.

Japanese traders had expected a further cut in premiums due to a cautious demand outlook, but also anticipated a limited drop as suppliers kept citing the material's tightness and higher premiums outside Asia.

"We've settled most of our deals evenly spread between $116-$118," said one trader involved in the talks.

"From the Japanese point of view, we'd have liked a lower level given rising inventories and not-so-rosy demand outlook, but suppliers cited tightness and would not concede."

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.

Traders said the same structural issue which has prevented a sharper cut in premiums over the course of 2010 remained: the financing deals that have tied up much of LME aluminium stocks and kept supplies from hitting the market, despite LME warehouse inventories hovering near record highs. MAL-STOCKS

"We've settled about half of our deals at $116, as suppliers acknowledged a slowdown in demand, but they still insisted on tightness resulting from the LME issue," another official also involved in the talks said.

"The recovery in aluminium demand is 80-90 percent of what it was before the global economic crisis in late 2008, but premiums are about $30 higher than then. It is contradictory," he said.

The premiums in the fourth quarter of 2009 were set at $115-$120, a jump of nearly 60 percent from $75 settled for the third quarter of 2009 when strong demand from China and supply suspension from Russia pulled up premiums.

An official at an end-user said some buyers were limiting their purchase volumes given an uncertain demand outlook for the fiscal second half from Oct. 1 and also noted rising aluminium stocks at Japanese ports as a sign of sluggish demand.

"About half the deals appears to be done at $118 while the rest seems to be done around $116," the end-user official said.

One end-user said he has settled all of his firm's deals at $116 while another end-user said one deal was done around $115 with the rest of the firm's deals discussed between $116-$118.

Demand for aluminium, widely used in products ranging from computers and electronics to the food sector, is weighed down by the end of government subsidies for car purchases, a slack construction sector and less-than-expected use of aluminium cans.

Aluminium stocks at three key Japanese ports rose to 236,100 tonnes in August, the highest since May 2009, as summer holidays kept deliveries from the ports low.

Japan, which must buy nearly all the metal it needs, imports about 2 million tonnes of primary aluminium every year.

Aluminium term talks began in late August 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.

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