* Duty-paid aluminium premiums at $380-400/T in Europe
* Consumers buying hand-to-mouth
* LME's next steps in warehouse reform eyed (Adds details, quotes)
By Harpreet Bhal
LONDON, May 20 (Reuters) - Costs, or premiums, to obtain physical aluminium in Europe's spot market rose to record highs this week as tight supply prompted consumers to scramble for material, traders said on Tuesday.
Premiums, paid over the London Metal Exchange (LME) cash prices, have been trading at $380 to $400 a tonne this week for duty-paid material, traders said.
Persistent appetite for financing deals backed by aluminium supplies and logjams in releasing metal from storage have kept supplies tight, while the LME battles to push through reforms aimed at freeing up metal stuck in queues at its warehouses.
Traders said consumers were buying small volumes to meet immediate needs and were not committing to larger quantities due to uncertainty about the short-term outlook for prices.
"The fact is that people are living hand-to-mouth in anticipation of this (rise in premiums) disappearing. But the way things are at the moment, I don't see that happening," a physical aluminium trader said.
At current levels premiums have risen more than 30 percent since the start of this year, and traders said a recovery in European demand could spur consumers to replenish stocks for the second half.
Traders said a widening contango curve, where futures prices trade at a premium to cash prices, was encouraging the renewal of financing deals that use aluminium as collateral, which further reduces availability of the metal.
Vast amounts of aluminium are locked up in financing deals, in which investors borrow money at low rates to buy physical aluminium, strike a warehouse deal to store it cheaply and sell it forward immediately at a profit.
The aluminium cash contract is trading at a $41.50 discount to three-month prices, compared with a $30.50 discount in early April, which was at a 10-month low. CMAL0-3
"With the wide contango, I see no reason why people should consider getting rid of the metal. They will hold on to it and keep things tight," another aluminium trader said.
The market is likely to keep a close eye on how the LME proceeds with proposed reforms to its warehousing rules, which were scuppered by a legal setback days before it was expected to come into force.
The LME said last week it had permission to appeal against a court ruling that halted the proposed reform. A successful appeal could allow the world's biggest marketplace for industrial metals to carry through with its planned reforms.
Traders said any signs indicating that the reforms could go ahead are likely to put downward pressure on aluminium premiums. (editing by Jane Baird)