Aluminum Heads for Biggest Weekly Gain in Two Years on Costs

Aluminum headed for the biggest weekly gain in more than two years on concern that an increase in power prices in China, the world's largest producer of the metal, will boost production costs and elevate prices.

Aluminum Corp. of China Ltd., the nation's largest producer of the metal, said today that production costs would be raised by between 200 yuan and 300 yuan ($43) for each metric ton of the metal. Power accounts for between 30 percent and 40 percent of operating costs for aluminum smelters.

``When they can't absorb the higher costs anymore, it will be passed on to consumers, otherwise they may cut production, both of which are helping to keep aluminum prices supported,'' Yang Zhenqiang, chief analyst at China International Futures (Tianjin) Co., said.

Aluminum for delivery in three months on the London Metal Exchange rose for the fourth day this week, gaining 2.2 percent to $3,141 a metric ton at 4:07 p.m. Singapore time, marking a 6.7 percent rise from last week, the biggest weekly gain since June 30, 2006.

September-delivery aluminum on the Shanghai Futures Exchange added as much as 1.2 percent to 19,350 yuan a ton, and closed at 19,345 yuan.

China will boost electricity prices by an average 4.7 percent on July 1 to rein in energy consumption and slow growth, the government said yesterday. China also plans to limit the price of coal burned in power stations until the end of this year.

Substitution Effect

Aluminum prices also gained on speculation that the high price of copper is spurring demand for cheaper substitutes. Codelco, the world's biggest copper producer by output last year, said sales of aluminum used for wiring and plastic for pipes have gained following copper's rise to a record this year.

``There has definitely been substitution going on,'' Yang said. ``However aluminum prices haven't been able to rally strongly because stockpiles are simply too high.''

Stockpiles of aluminum in London Metal Exchange warehouses stood at 1,078,325 tons yesterday, the most since June 2004. Aluminum inventories in Shanghai were at 179,886 tons this week, eight times the year-ago level.

Use of copper substitutes grew to 530,000 tons last year from 471,000 tons in 2006, the Santiago-based company said on its Web site yesterday, citing a study by the International Copper Association.

Among other LME-traded metals, copper rose 0.6 percent to $8,380 a ton, zinc gained 1 percent to $1,953, lead gained 2.4 percent to $1,855, nickel added 2 percent to $22,650, and tin advanced 1.3 percent to $22,700 at 4 p.m. in Singapore.

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