ANALYSIS-Record LME aluminium stocks can't restrain price rise

By Pratima Desai LONDON, July 22 (Reuters) - A lack of aluminium combined with stronger demand from car makers is likely to push up prices of the metal over coming weeks, even though stocks in London Metal Exchange warehouses are at record highs. Aluminium could breach $1,800 a tonne, a level last seen in November 2008, while some analysts think a brief spike towards $2,000 a tonne is possible. The metal used in transport and packaging was around $1,710 a tonne on Wednesday. The idea of shortages may seem odd at first glance, but a close inspection reveals that a lot of the 4.5 million tonnes of aluminium stored in LME warehouses is tied up in deals to release cash for producers. 'There's less metal available than the figures suggest ... If demand picks up then people could be scrambling for material,' said Michael Widmer, analyst at Bank of America ( BAC - news - people ). That demand could come from the car industry, which with help from government stimuli and incentives to junk old cars for new cars, is reviving after months of collapsing sales. 'The worst seems to be behind us in terms of demand from the auto sector, which has run down inventories. Now we have a whole host of government stimuli ... (aluminium) demand is going to pick up,' Widmer said. Aluminium hit a record high of $3,380 a tonne in July 2008 and collapsed to below $1,300 a tonne in February on escalating fears that recession could turn into a 1930s style depression. Lack of material is already being reflected in premiums paid for physical material over futures contracts. Japanese primary aluminium consumers last month agreed to a 30 percent hike in premiums for the current quarter. In Europe, the premium has risen to around $65 a tonne compared with $10 in early March. STOCK TIED UP About 70 percent of the stocks in LME warehouses -- 3.15 million tonnes -- is thought to be tied up in financing deals until May 2010. Many of these deals came about because producers needed cash and three-month aluminium prices at the end of May were about $150 a tonne below those for material in May 2010. Banks bought and sold the aluminium and pocketed the $150 a tonne difference. Lower storage costs in return for leaving metal longer with warehouses helped boost profits. Potentially important is that of the remaining 30 percent or 1.35 million tonnes of stocks, about 13 percent is cancelled warrants -- material no longer available to the market. A large proportion -- about 75 percent -- of cancelled warrants is at warehouses in the United States. 'It could be due the fact that the scrap market has become a bit tighter, we have seen U.S. consumers coming back into the market, premiums are up in the U.S.,' said Gayle Berry, analyst at Barclays ( BCS - news - people ) Capital. But Berry said the build up of cancelled warrants could be misleading as a large number of new warehouses registered with the LME could mean metal is being moved around between different warehouses and showing up as a decline in inventories. NEW FOR OLD Car makers account for about 30 percent of the global aluminium market estimated at around 37 million tonnes. Government schemes to persuade consumers to turn in old cars for new cars have boosted demand in some European countries. Expectations of a pick-up in auto sector activity in the United States this quarter is also likely to give aluminium prices a big boost. 'Auto production schedules point to seasonally adjusted growth in assemblies of 400 percent in (the third quarter) ... This could lead to a boost in U.S. auto production of 1.0-1.5 million units,' Barclays Capital said in a note. Analysts estimate the production of one million cars in the United States would need about 150,000 tonnes of aluminium, while 1.5 million cars would need 225,000 tonnes. Booming car sales in top aluminium consumer China form part of the equation. Car sales in China rose an annual 47.7 percent to 872,900 units in June as government stimulus boosted demand. 'China is a very important car market, it is growing very quickly,' said Dan Smith, analyst at Standard Chartered ( SCBEF.PK - news - people ), which expects aluminium prices to average $1,800 a tonne this quarter.