Concern takes shine off aluminium prices

Fear of a return to economic downturn knocks sentiment

Fears of a double-dip recession have dented aluminium prices, which are off 21 per cent in the past two months. The steady decline to Friday's close of US$1,944 a tonne on the London Metals Exchange was driven by fears of an economic slowdown in Europe and concerns of a construction downturn in China, following a tightening of regulation by the central government, analysts said. The metal is one of the UAE's most important export commodities after crude oil and petrochemicals. Recent negative sentiments have cut into a 14-month rally that saw aluminium prices double to almost $2,500 tonne from their low in February last year.

Aluminium consumption is closely tied to economic growth and prices will remain weak this summer, Deutsche Bank said in a report last week. "We believe the [metals] complex remains vulnerable in the coming months as austerity measures in Europe and a slowdown in Chinese property market may crimp demand," the analysts wrote. "We [also] remain cautious going into the seasonally weak summer slowdown period. We believe that aluminium and zinc are near fair value at current levels but warn investors that they could remain there for several months."

Few analysts expect the price to go much lower; a weighted average of 16 forecasts by Bloomberg predicts prices in the next quarter to average $2,048 a tonne. But even at current levels, the price is low enough to worry some producers. Oleg Deripaska, the chief executive of Rusal, the world's largest aluminium producer, said earlier this month that at prices of $1,926 a tonne, 70 per cent of the world's aluminium smelters were unprofitable.

He told Bloomberg that financial investors trading in the metal to make a profit were responsible for the price decline. "It's a climate of short-sell," he said. "It's the hedge funds and others just playing their games. We can see physical demand is very strong." [e-mail]