July 17, 2014 3:26 pm

Aluminium jumps to 16-month high amid falling inventories

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The price of aluminium has reached its highest level for 16 months as falling inventories, smelter closures and a strong demand outlook continue to attract buyers.

Aluminium, the second most widely used metal after steel, has been in the doldrums since the financial crisis as the market struggled to digest rising supply and towering stocks.

But since slumping to a four-and-a-half-year low of $1,675 a tonne in February, the price has rallied sharply, helped by production cuts and an erosion of aluminium inventories at London Metal Exchange warehouses.

Aluminium for delivery in three months on the London Metal Exchange rose 1 per cent on Thursday to $1,990 a tonne, extending gains since the February low to more than 19 per cent.

The last time the metal traded above $2,000 was in March 2013.

Companies such as Alcoa, Rusal and Rio Tinto have been shutting smelters over the past two years in an effort to tackle the oversupply of aluminium, which is used in everything from drinks cans to motor cars.

These closures have helped offset rising production from smelters in the Middle East.

At the same time, demand has remained strong. Citi sees demand growth of 6 per cent a year between now and the end of the decade, driven by the increased use of aluminium in car production.

“We expect the US auto sector alone to add an additional 400,000 tonnes of consumption to 2014 US demand as Detroit producers roll out new models with greater use of aluminium chassis and body panels,” it said a recent report.

Last week, Alcoa, the US aluminium group, reported second-quarter profits well ahead of analysts’ expectations thanks to a sharp turnround in the performance of its commodity metal business.

Sentiment has also been helped by a decline in inventories. Earlier this week, LME stocks dropped below 5m tonnes for the first time since September 2012.

“When we look at the market outside China, demand is good and productions cuts are coming through,” said Eoin Dinsmore, senior analyst at CRU, a consultant.

However, Mr Dinsmore said he would be surprised if aluminium went much higher because there was still an enormous stock overhang.

On top of the LME stocks, there is thought to be a further 5m tonnes of inventories in non-LME warehouses. “It will take years to get that down to a sustainable level,” he said.

In addition, analysts say there will be no more smelter closures outside China if the all-in aluminium price – the LME price plus a physical premium – stays where it is.

“Rather than seeing more production cuts through the remainder of 2014, we now expect primary aluminium production to grow more strongly than previously expected, on Chinese restarts and higher Middle East output,” Citi said in its report.

David Wilson, analyst at Citi, said the only buyng of aluminium in the past couple of weeks had come from managed futures accounts.

“Consumers have conspicuously shied away from chasing the metals. Most hedge funds don’t appear to have been on this rally as they don’t appear to believe the story,” he said.

On China, Credit Suisse reckoned one-third of China’s idled aluminium smelting capacity was poised to come back on line.

“Pot-lines producing around 700,000 tonnes a year are being switched back on, largely in response to local governments keen to prop up sagging regional GDP,” it said in a note to clients.

Traders also believe there is a significant surplus of metal in China, some of which is leaving the country in the form of semi-finished products.

Reports earlier this month claimed that 850,000 tonnes of Chinese aluminium extrusions had turned up at a casting facility in Mexico.

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