Negotiations for term premiums for primary aluminum exported to Japan in the fourth quarter are expected to start Thursday or Friday after one overseas supplier makes an offer to Japanese buyers, sources said Wednesday.

The negotiations take place amid falling spot premiums in Europe and North America, down around 5% from late May when the third-quarter premiums were being negotiated. The premiums fell in response to the July 1 London Metal Exchange warehouse reform proposal, aimed at increasing availability of warehoused aluminum in the market, sources said.

Asian premiums, however, have not moved in tandem with the European and the North American premiums so far. Platts spot Japanese import premiums have risen to $250-251/mt plus London Metal Exchange cash, CIF main Japanese ports, from $248.50-249.50/mt on May 31.

LME warehousing is not an Asian issue, Japanese sources said. Unlike in North America and Europe, it has taken less than a year to take aluminum out of LME warehouses in Asia.

But the Japanese aluminum buyers said there will be ripple effects on the Q4 premium talks because they will consider all market scenarios for the coming three months. One possibility is European and US suppliers offering low premiums.

"Through swap trades with Australian and Middle Eastern sellers, it is possible for the European trading houses who do not keep any metal in Asia to do deals with the Japanese buyers," one Japanese trader said.

Japanese traders also said they have not received interest for term deals apart from the regular sellers -- eight producers and one European trading house.

"But our avenue of communication is spreading to new players," the trader added. "I am opening up to new business partners who would want to sell at lower premiums."

Another possibility is supply tightening due to Australian, New Zealand, Russian and North American smelters -- whose production costs are over $1,900/mt -- curtailing output.

"I want premiums to fall, but neither do I want supplies to dry up because of that," said one Japanese rolling mill source. Trading house Sumitomo Corp. in its July report to customers has forecast $1,650-2,150/mt for LME for October through December.

If LME three-months stay at $1,700/mt or below for some time, most smelters supplying Japan will be running deficits, sources said. Market participants expressed caution about the uncertainties.

"There are more end-users avoiding purchases for deliveries three-months later and beyond," said the Japanese trader. "They want to buy just the amount they need."

At the same time, end-users are also concerned about possible supply cuts. There is a possibility that the Japan-Indonesia joint venture that runs a 250,000 mt/year Inalum smelter will expire in October. If the partnership ends, Japan will lose a total of 40,000 mt of aluminum supply this year, or 20,000 mt/month over November-December.

Customs data show that Japan's aluminum imports fell in the first half of the year. Japan imported 689,691 mt of primary aluminum ingot over January-June, down from 788,765 mt over the same period of 2012.

"Some Japanese buyers had cut down term purchase volumes in April due to soaring stocks," said a second rolling mill source. "Now they think they have cut down too much [and] may have to ask producers for increases in volumes."

Japanese traders, however, said there are four smelters in the Middle East capable of covering the potential 20,000 mt/month loss from Indonesia.

Traders have their own concerns. They said news of end-users buying at extremely low prices causes anxiety, as it might suggest falling Japanese import premiums that will create losses for them. A producer source said he was wary of businesses getting off track from supply and demand factors.