Correction in aluminium prices gives a buying opportunity: Sharekhan

NEW DELHI: Aluminium prices have corrected nearly 12 per cent after hitting the cycle high of $2,803 on 3rd May earlier this year. The fall in prices leaves a good opportunity for long term buyers to go bullish, says a research report by Sharekhan Ltd.

The LME 3-month aluminium is well placed to rise to $2,750 in a year. The brokerage has initiated a 'BUY' call at $2,466 (Rs109.70 on the MCX) with a positive bias, says the report.

Aluminium is attractive at current levels owning to tightening supply, increasing demand in major countries, strong performance of base metals, rising output cost and substitution effect.

The weakness in the metal is on the back of softening of crude oil prices, ongoing Euro zone debt crisis and a soft patch in US economy, especially in the housing sector.

China which accounts for nearly 40 per cent of total global aluminium output increased its production in June to
13.3% from a year ago to a new high of 1.59 million tonnes, while total production increased 5.6% to 8.64 million tones in first six months of the year.

However, despite the increase, Shanghai Future Exchange Inventories (SHFE) has come off sharply by 56.66% to 215,829 tonne from a level of Rs 498,008 tonne seen on June 24, 2010.

China also plans to phase out old aluminium smelters. It is estimated that 22 aluminium smelters with 619,000 tonne of capacity would be closed by end-2011. This planned shutdown of smelters would counter the impact of new supplies coming on line.

World demand for aluminium will double in the next decade, driven by growing use in aircraft, transportation and luxury cars, major European products maker AMAG said on July 11, 2011.

Base metals have outperformed equities in general in the light of negative cues coming from euro zone debt crisis, China tightening its monetary policy, sharp rise in US Dollar.

The MSCI global equities index reached a temporary peak of 1397.57 on May 2 this year. The index closed at 1313.17 on July 15, which translates into a correction of 6.03% in the said period. In the same period, the LME Index corrected only 1.34%.

However the brokerage also flagged concerns to their view from a sharp deterioration in global macro situation owning to European debt crisis, slowdown in US economy and run-up in crude oil could adversely affect the fundamental picture.

At the same time, the report also highlighted controversy regarding load-out rates for aluminium from the LME registered warehouses. However, changes in load-out rates are unlikely to lead to dumping of the metal in the market due to persistent low global interest rates and suppliers' desire to keep premiums high.