* Sees premiums spiking 50 pct to $500/$600 T
* China to slash output by 3.5 mln T this year
* Chinese banks with loans to pressure Chinese producers
* Indonesia export ban boosts costs of raw material bauxite (Updates with more details, quotes)
By Eric Onstad
LONDON, June 3 (Reuters) - Loss-making Chinese aluminium producers are expected to cut 3.5 million tonnes of output this year, helping to tighten supply and sending premiums for physical metal to fresh record peaks, a Rusal executive said on Monday.
Deputy Chief Executive Oleg Mukhamedshin of the Russian producer forecast in a telephone interview that a shortage of available physical metal would push up premiums as much as 50 percent.
"Taking into account the expected deficit and due to expected production cuts, we think the premium can easily reach a new record high well above $500. In the third quarter we can see new records, even $600 would not be out of the question."
Premiums for immediate delivery of metal, a levy on top of the cash price on the London Metal Exchange have already hit records in Europe and Japan of about $400 a tonne this year. .
Even though there are millions of tonnes of inventories, the bulk of them are not available to the market because they are tied up in backlogs at warehouses or in financing deals.
Queues of up to two years to access metal at LME-registered warehouses prompted complaints by industrial consumers and led the LME last year to launch a series of reforms aimed at reducing the backlogs and boosting transparency.
A key LME reform to cut queues to a maximum of 50 days, however, was halted after Rusal won a court decision in March because consultations were "unfair and unlawful". Rusal was worried the reforms would weigh on prices
Mukhamedshin declined to comment on moves by the LME to appeal against the ruling.
Capacity cuts in China, the world biggest producer and consumer of aluminium, would be driven by higher material costs following a ban on unprocessed ore exports by Indonesia and by Chinese banks unhappy with outstanding loans, Mukhamedshin said.
"We expect more production cuts," he said. "The banks are very unhappy with the situation and cannot continue to roll over these bad loans."
Rusal, one of the world's biggest aluminium producers, estimates that China has already cut 2.1 million tonnes of production so far and will cut another 1.5 million tonnes before the end of the year, out of total annualised output of around 27 million tonnes.
This would lead to a largely balanced market in China and a deficit in the rest of the world of about 1.4 million tonnes this year, he said.
A glut of output in China was behind a 50 percent surge in total aluminium stocks there to an estimated 3 million tonnes earlier this year, sparking a sell-off in Shanghai futures to record lows, he added.
At the current aluminium price of around 13,300 yuan on the Shanghai Futures Exchange about 60-70 percent of Chinese capacity is loss-making, Mukhamedshin said.
The Chinese government is also pressuring loss-making and polluting companies to close capacity as part of its reform programme.
Another factor weighing on Chinese aluminium producers is a ban in January by Indonesia of unprocessed ore exports, which has boosted the cost of raw material bauxite by about $20 per tonne to $70-$85, he added.
"You can also see the increasing cash cost of production in China, which is partially driven by the Indonesian export ban."
The Indonesian ban has sent nickel prices soaring by about 40 percent this year, but the impact on aluminium was not expected to be as strong as on nickel, Goldman Sachs analyst Max Layton said in a note this week.
Bauxite accounts for a smaller proportion of aluminium output costs and there are numerous alternative suppliers, Layton said. (Reporting by Eric Onstad, editing by Louise Heavens and Susan Thomas)