NEW YORK, Nov 20 (Reuters) - The recent rise in aluminum prices should taper off as overall high inventories and limited demand outweigh near-term speculative buying and temporary tightness, BB&T Capital Markets said Wednesday.
Analyst Lloyd O'Carroll wrote in a November BB&T monthly aluminum update that prices nearing $1,400 a tonne on the London Metal Exchange (LME), equal to about U.S. $0.635 a lb, were overbought by momentum traders and fund managers following a period of tighter physical metal availability.
This has occurred "because inventories have been increasingly concentrated in the hands of relatively few traders," said O'Carroll. "This condition led to market tightness, despite a high level of LME inventories, because a lot of metal has been tied up in stock financing deals and hence unavailable to the market for up to a year."
A narrow contango, or higher values in successive forward months, could give way to backwardation, meaning firmer nearby prices, into year-end, before fundamentals come back into play, the analyst said.
If and when the tightness alleviates, primary aluminum prices could pull back toward the $1,300-$1,325 a tonne range, added O'Carroll.
LME aluminum for delivery in three months scaled a five-month peak of $1,405 a tonne this week. Wednesday, it closed up $4 at $1,381 a tonne.
U.S. Midwest aluminum premiums have also spiked this month, with quotes ranging from 4.25 to 4.5 cents a lb above the official LME cash settlement price.
The BB&T analyst said he expects to see a sustained up-trend in prices starting in the second half of '03, as the global economic environment becomes more positive.
But until better conditions begin to support the market's fundamentals, high metal stocks could continue to mount.
LME aluminum inventories stand at around 1.289 million tonnes, off the 7-1/2 year peak of 1.3 million in September.
Meanwhile, strong economic activity in China may help support aluminum this year, O'Carroll said, citing his forecast that Chinese demand will increase 11 percent in 2002.
Some market forecasts for growth to exceed 25 percent might be overstated as new capacity could be slow to come on-stream while older, inefficient Soderberg capacity is being shut down, he added.