Aluminium at 14-mth high

Aluminium producers are pleasantly surprised, as the price of the base metal reached a 14-month high of $2,188 per tonne this week despite the absence of any surge in consumption.

P K Parida, executive director (marketing) at the public sector National Aluminium Company (Nalco), said the price rise had in fact “dumbfounded” him. “We never expected the price to recover to this level so soon, as there was no real pick-up in consumption from the western countries, which are the largest consumers,” he said.

Industry observers said the price rise was due to artificial demand created by bankers who bought the metal at spot in May when the prices were ruling at just $1,466 a tonne and kept this in the London Metal Exchange (LME) warehouse. These banks then sold a one-year forward contract, which was selling at $150 premium over the spot price.

Now, 70 per cent of aluminium inventory at LME is tied up till May next year and the demand has started picking up in developing countries like India and China.

The price of the metal that is used for automobile, packaging and houses had reached a high of $3,271 per tonne on the exchange in July last year on the back of an economic boom. But the following financial crisis led to a crash in the base metal’s price by 62 per cent, to $1,251 per tonne, in February. In May, the average price of the metal was $1,466 per tonne. Since then, the prices went up by 75 per cent to $2,188 on Wednesday.
 

PRICE RISE
Aluminium Spot Market Prices at London Metal Exchange	($/tonne)

July 20083,271 Feb 20091,251 May 20091,466 Dec 9, 20092,188

After the price crash, aluminium producers globally needed cash. At that time, banks took the stock off their hand and put it at the LME warehouse. This increased the inventory of the exchange to over 4.6 million tonnes from the normal level of 1 million tonnes. To hedge their investment in the metal, banks sold one year forward contracts.

“It was a completely risk-free investment for banks, as the future was trading at a substantial premium at that point of time,” said Navin Vohra, national metals and mining leader at Ernst & Young.

Metal producers, including Aditya Birla Group-promoted Hindalco Industries and Vedanta Group-controlled Bharat Aluminium Company (Balco) would also benefit from this artificial increase in the prices.