Aluminium rises as European disruption looms

Aluminium traded at its highest levels of the year, outperforming its peers in the base metals sector, while US natural gas prices jumped after an unexpectedly large stock drop. Aluminium hit $2,280 a tonne, helped by shortcovering and concerns about possible supply disruptions in Europe. Two Italian aluminium smelters owned by Alcoa have been threatened with closure due to a disagreement over power prices with the Italian government. Last week, the European Aluminium Association warned that two-thirds of Europe's primary aluminium smelters might shut in the near future due to high power costs. Aluminium prices have rallied 48 per cent this year in spite of stocks at London Metal Exchange warehouses reaching record levels, standing near 4.6m tonnes, sufficient for more than six weeks of global consumption. About three-quarters of the stockpile has been tied up by long-term financing deals by traders and merchants who anticipate that prices will rise further in 2010 and beyond. Leon Westgate, of Standard Bank, says the relentless rise in aluminium production in the face of a huge overhang of LME stocks remains a cause for concern. "Chinese output is at record highs [running at an annualised 15.24m tonnes in October] and there is still almost 5m tonnes of spare capacity in the country to fuel additional growth," said Mr Westgate, who noted that new production facilities in the Middle East were also starting to come on line. "Oversupply remains a serious concern for the aluminium market" said Mr Westgate, who is forecasting that cash aluminium prices will average $2,210 a tonne next year, rising to $2,470 a tonne in 2011. The benchmark three-month LME aluminium price ended at $2,209 a tonne, down 0.1 per cent. Copper fell 2.1 per cent to $6,800 a tonne, under pressure from continuing increases in LME stocks, up 3,125 tonnes yesterday. Michael Jansen, metals analyst at JPMorgan, said China was on track to import 3m tonnes of copper this year compared with 1.4m tonnes in 2008, far more than the country required and resulting in Chinese stocks rising to about 700,000 tonnes. "The western world needs to deliver a strong demand recovery to fill the gap in weaker Chinese imports throughout 2010," said Mr Jansen. JPMorgan said copper looked "very likely" to reach $8,000/$8,500 a tonne in the second quarter of 2010 but these price levels were unlikely to be sustained as inventory levels would continue to increase. Natural gas prices jumped after cold weather led to a larger-than-expected fall in US stocks, down 64bn cubic feet last week, compared with the consensus market forecast for a decline of 46bn cubic feet. Nymex January Henry Hub rose 4.3 cents, or 8.7 per cent, to $5.32 per million British thermal units. US crude oil prices retreated below the $70-a-barrel mark with Nymex January West Texas Intermediate sinking to a low of $69.81 before recovering to trade 13 cents lower at $70.54. ICE January Brent fell 53 cents to $71.86 a barrel. Gold dipped 0.3 per cent to $1,125 a troy ounce.