'Rising stocks won't cap energy-driven aluminium price' China's appetite for the metal expected to grow 30% this year

Print this page Posted on : 05-29-2008 by recycleinme.com

Tight lending requirements and a growing risk of defaults by consumers push more metal to LME stores. Investors are focused on longer-term fundamentals.

London Metal Exchange aluminium stocks are climbing fast, but that isn't scaring off investors who attribute the rise to hidden metal emerging from the woodwork, rather than signs of new supply flooding the market. As warehouse stocks rise, analysts are struggling to divine whether speculators, betting on falling prices, are trying to drive the market lower, or whether soaring freight rates and a tight credit market are forcing stocks into the public domain.

Huge inventories

But most analysts agree on one thing. China's insatiable appetite for aluminium is expected to grow as much as 30 per cent this year, enough to keep prices firm, as production of semi-fabricated products and beverage can sheet soar. ''Inventories are huge and still climbing. Maybe, someone is trying to make the material more visible? What this does tell us, is that the market has been running in a substantial surplus,'' said a dealer at an international trading house. LME stocks jumped around 5 per cent last week as thousands of tonnes poured into warehouse locations around the world, and are up around 30 per cent in the past 12 months.

High freight

A European physical trader said a lot of the material entering the market was originally Western metal-bound for Japan, but high freight costs had forced merchants to abandon those plans and instead dump the metal in the nearest warehouse. ''Some of the metal was meant for Japan but because of the record high freight rates, they decided to put the material in LME warehouses instead of shipping it over.'' Tight lending requirements and a growing risk of defaults by consumers, also meant more metal was being placed in LME stores.

STRONG FUNDAMENTALS

Regardless, investors are taking the rise in their stride, and are focused on the metal's longer-term fundamentals which are supported by soaring energy prices and concerns that power supplies will be unable to keep up with smelter expansion plans. ''The price has held up very strongly given where the warehouse stocks are and there really is an expectation that this market is going to become a lot more attractive,'' ANZ senior commodities analyst Mr Mark Pervan said. ''The demand story is very strong, especially in China, but there is a risk that Chinese supply will surprise on the upside and I wonder whether we are pricing in too many positive factors too soon.''

China outlook

Chinese aluminium capacity has almost doubled since 2003 to an estimated 16 million tonnes per year in 2008 according to Reuters Metal Production Database. Some analysts question whether the country can sustain that pace and said China could soon become a net importer of the metal to feed expansion in power infrastructure and transport. ''We forecast that China will become a net importer of primary aluminium this year, as we don't believe capacity expansion will keep track with demand growth,'' Mr Judy Zhu, commodity analyst at Standard Chartered Bank said.

Source : Business Line