Aluminum To Correct To More Realistic Level - Indus

LONDON (Dow Jones)–Aluminum prices are under pressure and set to fall further as the vastly oversupplied market corrects to a more realistic level following recent gains, traders, producers and brokers said Thursday. Having been dragged higher on the coattails of copper in April, fund short-covering kicked in and boosted aluminum further still in May. But after gaining some 25% from its February lows to regain the $1,600 a metric ton level, prices have subsequently fallen lower this week and are now around $1,390/ton. “Technically the market is looking very weak but it’s broken down exactly as it should,” an aluminum producer said. “None of this (price decline) should come as a surprise.” The car industry worldwide has for several months been suffering from a slump in demand, with automotive manufacturers seeking financing from state or other investors in order to avoid insolvency proceedings. This has led to a drop in demand for aluminum, a key raw material, and a subsequent rise in inventories. Stocks of aluminum in London Metal Exchange warehouses are making fresh all-time highs on a daily basis, and currently stand at 4.228 million tons. Physical merchants and warehousing companies told Dow Jones Newswires large quantities of metal are also being held off-warrant - meaning they don’t show up in LME data - in producer yards, on the side of port docks and in warehouses around the world. Compounding the bearish situation is China, where smelters - curtailed during the economic downturn - have been restarting due to the recent price increase. “If 90% of producers were estimated to be losing money at $1,500/ton, imagine how many are losing money at current prices,” said a non-Chinese producer, which has itself cut output. “The market’s deterioration will only stop if there are some very radical cuts.” Over 6.5 million tons of aluminum is estimated to have been taken offline around the world, but it is unclear how much of this has since restarted in China. More cuts are needed, however. “Aluminum is the most benighted of the base metals and the prospects for any near-term rally in the price is unjustified and will remain so until a lot more capacity is idled and ideally permanently closed,” said UBS analyst John Reade. The lower prices do have one positive, however: consumers are returning to the market. “I’m only just starting to get consumer buying around these levels - they sat on their hands through the rally and producers sold into it (the rally),” a broker said.