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Aluminum hits all-time record highs despite weak demand

Aluminum may have been responding to two different events in the week ending July 11 when it hit a succession of all-time price highs , but the market remains divided over the medium-term direction, given that world fundamentals point to weak demand and rising stock levels.

On July 7, three-months aluminum (see chart) on the London Metal Exchange climbed to an all-time high of $3,327/mt on LME Select - its highest level since $3,260/mt in 1988.

On July 10, it broke through this level and reached a fresh all-time high at $3,380/mt. During ring trade on July 11 its intraday high was $3,355/mt, while on Select it once again tested the previous day's $3,380/mt.

"The market and fundamentals have no relation. The price will do what the weight of money tells it to do." -- London-based trader

Aluminum finished floor trade for the week at $3,318/mt, up $150 from the July 4 closing price of $3,168.

Fundamentally, however, analysts and market players were mixed in their impressions of whether the price could be sustained, especially as word emerged from China that the cuts may not be a certainty.

Pointed out a US broker, "When you hear producers [in China] are shutting production because demand is weak, that's normally bearish," yet the market saw "insane" price moves.

"I hear metal just continues to pour into warehouses, and not all of it reported, obviously, [since] otherwise you'd see it in the stock numbers. A lot is going off warrant," he pointed out.

A London-based trader said the July 7 price move must not have been due to Chinese power/production issues (download podcast: Power shortages drive aluminum price rises), as the price would not have come off $180 the following day. "The price move was due to a market exercise," he said, adding: "The market and fundamentals have no relation. The price will do what the weight of money tells it to do."

Effect of high stocks, China output debated

The trader noted that with more than 1 million mt in LME warehouses and "another 1 million mt held off warrant at least" - the market was awash with metal.

"But if you're bullish you have to have something to hang your hat on," he said, referring to the bull's insistence that China would become a net importer during 2008. "China won't be a net importer this year. In fact I think they will produce more metal this year than they did last year," he said, adding that he believed stocks were building in China as well as in the rest of the world.

It was a decline in aluminum demand in China that prompted the government to cut electricity to the smelters, and to save excess capacity for the Olympics, pointed out analyst Leon Westgate of Standard Bank.

While Calyon analyst Robin Bhar agreed "prepositioning by Glencore" may have sparked the initial price move, and that China was at least a year away from becoming a sustained net importer, he said Calyon still saw an aluminum price move toward $4,000 by the end of the year based on rising production costs.

He maintained that it was difficult not to be positive about aluminum as it had underperformed and always seemed "late to join the party." He said as a result, aluminum was due a "blistering rally" at some point - "fast money loves the ali market and will bully it to get what they want to achieve."

Bhar said aluminum prices were supported in the long term by rising production costs and to power supply threats.

He noted that while LME stocks of more than 1 million mt sounded like a lot, in a 40 million mt market, this could be chewed up rather quickly if there were supply disruptions.

Created: July 15, 2008

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