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UPDATE 1-Japan Q4 aluminium premium rises to $88/T as demand recovers from COVID-19

* Oct-Dec premium marks first quarterly increase in five

* Producers come down from initial offers of $95-98/T

* Spot premiums are now at above $90/T (Adds details, quotes)

TOKYO, Sept 24 (Reuters) - The premium for aluminium shipped to Japanese buyers for October to December was set at $88 a tonne, up 11% from the current quarter, as demand began to pick up from the pandemic-induced shock, four sources directly involved in pricing talks said on Thursday.

The premium, up from $79 per tonne paid this quarter, marks a first quarterly increase in five. But it is lower than initial offers of $95-$98 per tonne from producers.

Japan is Asia's biggest importer of the light metal and the premiums PREM-ALUM-JP for primary metal shipments it agrees to pay each quarter over the London Metal Exchange (LME) cash price set the benchmark for the region.

The latest quarterly pricing negotiations began late last month between Japanese buyers and global suppliers including Rio Tinto, and South32.

“We have agreed with all of producers at $88 a tonne by the middle of this month,” a source at a Japanese end-user said.

Higher premiums reflected recovering demand as Japanese automakers started to increase production from around September after a steep reduction earlier to curb the spread of the COVID-19 and to cope with the pandemic-led collapse in demand, he said.

Still, buyers have sought lower levels than producers’ initial offers as there was still uncertainty over demand outlook going forward due to a resurgence of the pandemic and weaker spending by consumers, he added.

Some producers were not satisfied with the level, however.

“It should have been higher, but we had to compromise to sign all deals at $88 a tonne as another producer quickly came down to the price in an early stage of the negotiations,” another source at a producer said.

The sources declined to be named due to the sensitivity of the talks.

“But spot premiums are at higher levels now, between $90 and $100 a tonne, to mirror higher premiums in the United States and Europe as well as active stock financing deals in Asia,” the second source said.

An increase in stock financing deals, using warehouses in Malaysia and South Korea, by global traders and financial investors who are taking advantage of super low interest rates to borrow money is limiting supply of physical metals, he said.

The LME’s contango allows traders and investors to lock in a guaranteed return simply by buying cash metal and selling it forward while holding the metal in the warehouses.

Reporting by Yuka Obayashi; Editing by Shailesh Kuber

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