Aluminium touched the highest levels in 16 months on Wednesday after data showed stronger economic growth in top metals consumer China amid producer cutbacks and eroding inventories. Benchmark three month aluminium on the London Metal Exchange surged to a session high of $1,993 a tonne, the strongest since March 13, 2013, before closing at $1,972 a tonne, up 0.6 percent.
Several analysts expect a deficit in aluminium this year due to output cuts by producers and robust demand after many years of oversupply. The world's largest producer, Russia's Rusal was unlikely to start production at its Siberian Boguchansk aluminium project in 2014, the Eneergy Ministry said on Tuesday. "There has been discipline in the aluminium industry, there is no doubt about that, but where I temper my bullishness is how long is that going to be maintained?" said Grant Sporre, head of metals research at Deutsche Bank.
"Historically, as soon as the price has recovered, the Chinese curtailments have always come back into the market again." Erosion in LME aluminium inventories has also contributed to a 13 percent price rally since late May. Stocks dropped below 5 million tonnes this week for the first time since September 2012 and fell another 9,975 tonnes on Wednesday.
Even though stock levels are still high, the bulk is tied up in warehouse backlogs or financing deals and therefore not available to the market. Reflecting a tightening market, the discount for cash aluminium to three-month prices narrowed to $19.50, its smallest since late 2012.
Aluminium along with other metals got a boost from data showing China's economy grew slightly faster than expected in the second quarter as a burst of government stimulus paid off. Analysts said further support was likely to be needed to meet China's growth target for 2014. "The data today is all pretty good. The fine-tuning put in place definitely seems to be having the desired impact of stabilising growth, and our view is that we're likely to see stronger growth again in the second half," said analyst Lachlan Shaw at the Commonwealth Bank of Australia in Melbourne.
"We are not talking about a raging bull market, but the point is we are past the weakest point of growth in China. The government is demonstrating its determination to backstop growth and that's all positive for commodity demand and pricing." In other metals, benchmark copper closed at $7,078 a tonne, down 0.7 percent, while zinc closed at $2,303, up 0.2 percent, after touching its highest in almost three years at $2,325.50 a tonne on Monday.
Global miner Rio Tinto lifted guidance for its share of mined copper production by 15,000 tonnes to 585,000 tonnes. A surplus is seen blunting copper price rises in the second half. In zinc, investors see potential for further gains due to upcoming mine closures, which are expected to create shortages. The global zinc market was in a 194,000 tonne deficit in January to May, a monthly bulletin from Lisbon-based International Lead and Zinc Study Group (ILZSG) showed.
Broker Marex Spectron said bullish bets by speculators had increased in zinc and that the metal overtook nickel as having the biggest long position on the LME, representing 36 percent of open interest. The LME has not yet started releasing positioning data, but Marex calculates weekly speculative positioning estimates on the LME using a computer algorithm to sift market data.
"We know that galvanising demand is picking up in the US manufacturing sector and we've seen LME and Shanghai stocks decline. The market might be getting ahead of itself, but certainly we are getting towards the business end of that supply crunch," Shaw said. Nickel ended at $19,300, down 0.1 percent and lead closed almost flat at $2,204.4 a tonne. The global lead market was in a 20,000 tonne deficit in January to May, data from ILZSG showed. Tin, untraded at the close, was bid at $22,075 a tonne, down 0.5 percent.
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