June 25, 2008 / 4:10 PM / in 12 years

UPDATE 5-Aluminium stalls, but looks set for new high

* Market awaits U.S. rate decision

* Aluminium eyes record highs

* Rising energy costs boost aluminium’s fundamentals

(Updates prices, refreshes comment)

By Pratima Desai

LONDON, June 25 (Reuters) - Aluminium prices look set for record highs on the back of strong fundamentals, analysts said on Wednesday, as other industrial metals held steady ahead of a decision on interest rates by the U.S. Federal reserve.

Aluminium MAL3 for three-months delivery on the London Metal Exchange ended the day at $3,058 a tonne, knocked slightly by rising inventories, compared with $3,105 a tonne at the close on Tuesday.

The metal used widely in power, packaging and transport, touched $3,169 on Monday, the highest level since the middle of March and only about $150 below the all-time high of $3,310 a tonne hit in May 2006.

The trigger for the rise this year was power disruptions in China, the world’s biggest producer and consumer of the energy-intensive metal, because of severe snow-storms.

That focused the market’s attention on how reliant aluminium production is on electricity, being pushed up by record high oil prices.

“Electricity and energy prices have risen dramatically. They will be the single most important factor for higher aluminium prices. Producers have to cover their costs,” said Eugen Weinberg, commodities analyst at Commerzbank.

“Aluminium will be one of the best performing metals this year. I think prices could go as high as $3,500 a tonne by the end of the year.”

Analysts say production costs in China are among the highest worldwide, and expect the sector’s expansion to slow.

“We see ... a significant underperformance of Chinese aluminium production growth over the rest of this year and into 2009, a key reason that we remain bullish on aluminium prices,” Barclays Capital said in a report.

KNEE-JERK REACTION

Attention on markets for most industrial metals focused on the U.S. central bank, which was due to announce its decision on interest rates at 1815 GMT with a statement on the outlook for economic growth and inflationary pressures.

Officials at the Federal Reserve have over the last few weeks highlighted inflation concerns, which has led the market to think that the benchmark funds rate at 2 percent could be a bottom and that the next move could be a hike.

That has helped bolster the U.S. currency and put downward pressure on metals, which are priced in dollars.

“If we get more anti-inflation rhetoric from the Fed, the dollar will rise, which means we will see a knee-jerk reaction in base metals,” a London-based trader said.

Copper MCU3 used by investors as a benchmark of the base metals complex, closed at $8,300 a tonne, down slightly from Tuesday’s final quote of $8,345/8,350.

The metal used in power and transport hit a record high of $8,880 a tonne on April 17 on expectations of strong demand growth from China.

But that demand hasn’t materialised and analysts say a seasonal third quarter lull could take prices even lower.

China consumed 401,881 tonnes of refined copper in May, down by 45,833 tonnes from April, according to Reuters calculations based on net imports, output and domestic stocks. [ID:nHKG210014]

Refined copper consumption and imports are expected to stay weak throughout the summer, as Western economies’ demand for Chinese exports falls and as China clamps down on polluting factories to clear the air for the Beijing Olympic Games.

“Net refined copper imports fell by 31 percent month-over-month and 23 percent year-over-year in May, suggesting limited price support from Chinese buyers at present,” Lehman Brothers said in a note.

Zinc MZN3 ended the day at $1,875 a tonne from $1,899, lead MPB3 closed at $1,782 from $1,825, nickel MNI3 was at $21,700 from $21,500 and tin MSN3 closed at $22,705 from $22,700.

Metal Prices at 1530 GMT Metal Last Change Pct Move End 2007 Ytd Pct

move LME Cu 8295.00 -50.00 -0.69 6670.00 24.36 SHFE Cu* 62280.00 190.00 +0.31 56880.00 9.49 LME Alum 3055.00 -50.00 -1.61 2403.00 27.13 SHFE Alu* 19105.00 -55.00 -0.29 18180.00 5.09 COMEX Cu** 376.50 -2.85 -0.75 303.05 24.24 LME Zinc 1865.00 -34.00 -1.79 2370.00 -21.31 SHFE Zinc* 15835.00 -110.00 -0.69 18950.00 -16.44 LME Nick 21600.00 100.00 +0.47 26350.00 -18.03 LME Lead 1775.00 -50.00 -2.74 2550.00 -30.39 LME Tin 22550.00 -150.00 -0.66 16400.00 37.50 ** 1st contract month for COMEX copper * 3rd contact month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07 (Additional reporting by Daniel Magnowski; editing by Peter Blackburn)

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