Power worry fuels aluminium rise to 4-month high

LONDON - Aluminium rose around 2.5 percent to a 4-month high on Monday as investors bet on higher prices of the energy-intensive metal amid escalating worries over power problems in China, the world's largest producer.

By (Reuters)

Published: Mon 7 Jul 2008, 9:16 PM

Last updated: Sun 5 Apr 2015, 12:48 PM

The metal used widely in packaging, transport and power traded at $3,245 a tonne, the highest since March 6, compared with a record high of $3,310 a tonne in May 2006.

Three-month aluminium traded at $3,232 a tonne on the London Metal Exchange in the open outcry trade, up $64 from Friday.

The rise was triggered by Aluminium Corp of China (Chalco), which said the firm's two aluminium smelters -- with combined capacity of 500,000 tonnes -- in Shanxi province had tight power supplies.

Chalco also said that it had not had a big impact, but the news reminded the market about the fragility of power supplies in the country, which is also the world's largest consumer.

"Aluminium's price rise is understandable to some extent, you had news out of China about power supply for two Chalco smelters," said Robin Bhar, metals analyst at Calyon.

Analysts estimate up to 45 percent of aluminium smelting costs are accounted for by electricity. Rising power prices, shortages and disruptions have boosted aluminium since January when severe winter weather hit Chinese output.

Reinforcing concern was news that coal shortages have led to record power shortfalls in northern China's Shanxi province and the coal-rich region had to ration supplies and even import electricity from Beijing to reduce deficits.

"The risks to aluminium supply are price supportive over the next 2-3 months,"JPMorgan said in a note.

"But this needs to be taken in the context of a market currently over-supplied, and showing robust production growth due to new capacity and attractive margins."

China's aluminium smelting capacity is expected to reach 15 million tonnes by the end of the year compared with about 12 million tonnes in January, analysts say.

Dominant China

Copper traded at $8,400/8,410 a tonne from a session high of $8,590 and compared with $8,470 a tonne on Friday. The metal used in power and construction is down nearly 6 percent since hitting a record high of $8,940 last week.

Some of copper's gains can be attributed to analysts expecting China, the world's top copper consumer, to take up the slack in demand created by the housing market crash in the United States, the world's second largest consumer.

"While China is a dominant factor, the US is still important to the outlook for commodity markets both directly through its own demand, and indirectly through its impact on the rest of the global economy, decoupling notwithstanding," Standard Chartered said in a note.

A fair proportion of the copper price rise is down to investors using it as an alternative investment to the dollar and stocks and shares, in much the same way they use gold.

But the dollar is stronger against the euro and that will weigh on base metals, which are priced in dollars and so become more expensive when it rises.

The other negative is a seasonal lull in metals demand as consumers shut down operations for maintenance and repair.

"We're moving into a traditionally quiet period. We could see some profit-taking in LME copper," a London trader said.

He added that short -- bets on lower prices -- position covering could help zinc prices spike up.

Last week the metal used for galvanising steel fell to $1,750 a tonne, its lowest since December 2005 as funds sold on expectations of rising supplies and stocks.

Zinc was up at $1,800 a tonne from $1,780 on Friday, lead gained to $1,580/1,582 from $1,565, nickel was at $20,605 a tonne from Friday's last bid at $22,400 and tin was at $23,250 from $20,550.

More news from Business