Aluminium to stay weak into 2010 - Bank of America

NEW YORK (Reuters) - Aluminium prices should remain weak into 2010, with smelters expected to restart some idled production despite a surplus already overhanging the global market, keeping prices at "bearish" levels, according to a Bank of America Merrill Lynch research report released Monday. The analysts said they look for an average aluminum price of $1,750 per tonne in 2010, up from their 2009 average price forecast of $1,660 per tonne. The benchmark aluminum price MAL3 on the London Metal Exchange ended Monday around $1,950 per tonne. Though smelters around the world have cut production, many closures have been temporary and the aluminum market remains dogged by excess capacity. "Looking at recent announcements of production restarts and the current project pipeline, we are concerned that the aluminium market may remain structurally weak," the note said. Although the analysts said they expect aluminium demand to recover, further capacity adjustments seem necessary to restore equilibrium to the aluminum market. The report said more smelters will have to close and some projects must be delayed. Smelters have delivered some excess metal into warehouses under financing deals, limiting metal availability on the spot market and contributing to a boost in aluminium prices. The analysts wrote that this move has been problematic, because production costs at most smelters are now below LME prices and many producers in areas like the Middle East, India, Canada, and Russia have positive margins, making unlikely a move to curtail additional smelter capacity. Yet, margins could be squeezed especially at higher cost producers, as prices come under pressure when the financing deals run out and structural oversupplies are exposed. Some higher-cost aluminium producers' margins could also become squeezed if economic recovery raises power prices. Power costs, driven by power consumption and tariffs, may cause some smelters to adjust to overcapacity and trim output. Europe has been one region where liberalization of power markets has had a significant impact on the smelting industry, causing several smelters to shut production and uncertainty about several other sites' ability to keep operating. On the other hand, utilities in some of Russia's key aluminium producing regions generate electricity from relatively low-cost hydro sources. And low operating costs at sites in the Middle East have allowed aluminium producers there to increase output for the year to date. Over the past few years, China has accounted for more than 50% of global aluminium production growth, sending its market into oversupply since 2002. Underinvestment in power generation has meant power supply has hit much of China's aluminium industry for the past decade. To tackle the power shortage, the Chinese government has implemented a series of measures aimed at reducing electricity demand along with other measures intended to restrain domestic aluminium output, like closing small and polluting smelters. "All the measures announced so far seem insufficient and we therefore stick with our bearish price forecast at $1,750 per tonne for 2010," the Bank of America analysts wrote. (Reporting by Carole Vaporean; Editing by David Gregorio) © Thomson Reuters 2009 All rights reserved