Aluminium and zinc prices were driven higher on Friday by mounting fears over supplies from China and worries about infrastructure in Sichuan province after a devastating earthquake there earlier this week. Copper, a popular alternative investment which is often used as a barometer of underlying economic activity, also tracked aluminium higher.
Aluminium for three-month delivery on the London Metal Exchange hit a three-week high of $3,071 a tonne. The metal used in the packaging, power and transport industries closed at $3,038 a tonne, up from $3,010 at the close on Thursday. Zinc, used for galvanising steel, hit a four-week high of $2,374.50 a tonne, before closing at $2,365, up from $2,315 at the previous close.
Analysts estimate Sichuan has about 500,000-700,000 tonnes a year - about 4 percent of the total in China - of aluminium smelting capacity. The region also produces about 200,000 tonnes of zinc a year. "The most important metals on the refined side are aluminium and zinc," said Michael Widmer, an analyst at Lehman Brothers. "Producers need to use power and roads to get their material out ... It's a tricky situation."
The problem is worse for energy-intensive aluminium because loss of Sichuan's output could push the market into deficit. Analysts expect supply and demand this year to be roughly balanced at about 40 million tonnes.
"More of a concern is the power situation; Sichuan is rich in hydropower, much of which is sent elsewhere to China, and this is really what is causing the nervousness in the aluminium markets," MF Global said in a note.
For zinc, Sichuan's output is not as crucial as analysts expect a surplus of around 100,000 tonnes this year. Shortages would probably only arise if smelters were closed for the rest of this year. "Zinc prices have risen ... but we expect support to be only temporary and for prices to come under pressure again before long," Barclays Capital said in a note.
"Lead supply is vulnerable to disruptions and the market remains tight this year." Sichuan also mines lead and disruptions could reinforce concerns about supplies. Lead closed at $2,345 a tonne, up from $2,275, and copper closed at $8,439 a tonne, up from $8,296. "Without clear evidence of some demand destruction (or a much stronger dollar), the price could stay relatively strong ... with possibly much higher price spikes on more serious supply-side events, out to the end of 2010," merchant bank Fortis said in monthly report.
Tin came within striking distance of $25,500 a tonne, a record hit on Wednesday as investors bought on expectations of shortages created by supply problems in top producers China and Indonesia. It closed at $24,600, down from $25,250/25,300 on Thursday. Nickel closed at $26,400 a tonne, up from $26,305.
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