China demand boosts aluminium prices

Growing optimism about China’s demand for cars, property and power grid construction coupled with a weaker US dollar is driving up the price of aluminium, according to Standard Chartered. 

The LME three-month price of aluminium is up about 26% over the low of late May and Standard Chartered believes the current price of US$1,715 per tonne will rise to US$1,800 per tonne in the third quarter before settling at about US$1,550 per tonne in the fourth quarter.

“While aluminium faces significant headwinds from very high inventory levels and the likelihood of smelter restarts, we believe that prices will continue to rally in the weeks ahead on the back of rising costs and physical premiums, before correcting lower by the end of the year,” analysts Dan Smith and Judy H. Zhu wrote in a research note to clients on July 23. “The market should then regain some upward momentum, and we are forecasting that prices will average US$1,825 per tonne for 2010.”

The upbeat forecast comes despite rising aluminium stocks on the London Metals Exchange in recent months, which are now at about 4.55 million tonnes — twice what they were at the start of the year or about 44 days of global consumption.

The Standard Chartered analysts believe about 75% of the supply is “tied up in financing deals” making it unavailable for delivery to consumers.

“A major bullish factor is that strong buying by China has driven aluminium imports up to unprecedented levels,” outlined the research note. “China has traditionally been an exporter of aluminium, but its imports of primary aluminium and products have surged recently.”

In the first half of the year, China imported 1.39 million tonnes of the metal, three times the amount during the same period a year-earlier. Admittedly most of that buying was intended to support local producers and prices and prevent lay offs. Standard Chartered believes “China’s stockpiling activity will prove to be price-sensitive and so imports should fade away in the months ahead.”

The analysts believe that aluminium consumption growth in China will “revert to positive ground in the coming months” as property development and auto production has driven up demand for aluminium semis, which began to increase in February “and soared to record high levels in May and June.”

“With property sales exploding and inventories in major cities running down to low levels,” they write, “we expect more property projects to be implemented this year, creating upside risks to aluminiium consumption in the months ahead.” They also point out that China’s auto production “has been creating fresh record highs since February on government stimulus measures for auto consumption.”

“Based on first half production figures, annualized output in 2009 could hit 12 million units, up 28% from 2008, potentially making China the world’s largest automotive market. This will provide significant momentum for aluminium demand in the second half.”

In addition, aluminium demand in China will be driven by government-sponsored investment in the power grid in the second half of the year. This year the bank expects the state to build about 75,000 km of power grid – 23% more than in 2008.

Another factor contributing to a strong outlook for aluminium prices the bank argues is that supply has been trimmed. Production dropped 4% between May and June, from 1.97 million tonnes to 1.89 million tonnes, the report said, citing figures from the International Aluminium Institute.