Rising inputs to prop Aluminum

Aluminum prices will be supported for the next three years by rising production costs in China, the biggest producer, and a recovery in global demand, Macquarie Securities Ltd said.

The aluminum market may expand to between 42 million and 45 million metric tons by 2012, analysts led by Jim Lennon said in a note yesterday, without giving a comparison. Higher input costs and a potential appreciation in the yuan will support prices, the brokerage said.

China last week raised power prices, which account for about a third of aluminum output costs, to help utility companies curb losses. Aluminum prices, lagging behind other metals, may rise as producers including Aluminum Corp of China Ltd pass on costs, Essence Securities said on Nov 20.

"The main potential upside risk to aluminum prices over the next two to three years is the potential for increases in the marginal cost of production," the analysts said.

Aluminum for three-month delivery on the London Metal Exchange rose 0.1 percent to $2,062.50 a ton in early trade. The metal has gained 34 percent this year. In Shanghai, it gained 1.28 percent to 15,850 yuan a ton yesterday.

Macquarie's call comes as Barclays Capital and Bank of America Merrill Lynch highlighted growing inventories and output gains of the metal used in airplanes and packaging. Macquarie's analysts also said there are concerns over inventory and production growth in China.

Chinese aluminum stocks have risen to 520,000 tons as of Nov 19, more than doubling from the first quarter, Macquarie said. Capacity utilization at Chinese smelters may rise from 80 percent in the period to the Lunar New Year next February.

Barclays Capital forecasts that the global surplus in aluminum will increase 29 percent to 1.63 million tons next year as the biggest annual price increase since 1994 spurs output.

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