Aluminium prices hit 17-month highs

Zinc and aluminium continued their strong recent rallies on Tuesday, hitting three-year and 17-month highs respectively.

The prices of both metals have been boosted by falling warehouse stocks and renewed investor interest in commodities. Zinc, which is used as a protective coating for iron and steel in construction and electrical appliances, has struggled to break through $2,200 a tonne since 2011. But, after doing so in late June, the price has continued to rise.

On Tuesday, zinc for three-month delivery on the London Metal Exchange gained 1.3 per cent to trade as high as $2,373 a tonne, the loftiest level since August 2011.

Persistent low prices for aluminium, used in everything from aeroplane bodies to beverage cans, have forced producers to shut smelters over the past 18 months. But, after reaching a low of $1,677 a tonne in February, the LME three-month price for the light metal has soared, to $2,055 a tonne on Tuesday. For the year to date, the price has gained 14 per cent.

"For both zinc and aluminium, the fundamentals of supply and demand have been moving in the right direction to encourage higher prices," said Nic Brown, head of commodity research at Natixis. "We are also seeing stronger interest in commodities from investors looking for a good story."

In the medium term, zinc is one of those commodities, even if the recent rally may be overdone, analysts say. LME warehouse stocks of zinc have declined from more than 1.2m tonnes in November 2012 to 656,275 tonnes. In addition, large supply cuts are looming, with Vedanta's Lisheen mine in Ireland and MMG's vast Century operation in Australia due to close next year. A number of new projects and expansions face delays.

The picture for aluminium is more complex. Warehouse stocks have fallen 10 per cent this year, to two-year lows, but are still huge, at 4.94m tonnes. The extent of the contango - where the price of aluminium for future delivery exceeds cash prices - has also fallen to an 18-month low, making the financing of metal less attractive. Traders say that some of the metal leaving LME warehouses had been flowing into off-exchange sheds, where storage costs are lower, and which already hold as much as 5m tonnes of metal.

Norsk Hydro, a major aluminium producer, said on Tuesday that low prices had encouraged companies to shut up to 5m tonnes of aluminium capacity over the past few years. Only 1m tonnes of that capacity can be easily restarted, according to chief executive Svein Richard Brandtzaeg. He said the global aluminium market was in its best shape since the financial crisis.

"The market is becoming tighter and there is a deficit of aluminium in the market outside China," said Mr Brandtzaeg.

At the same time, demand is strong, especially in the US where automakers are using more aluminium, instead of steel, to cut the weight of cars.

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