Shanghai Aluminum Declines After London Erases Gain to Record

By Li Xiaowei

July 9 (Bloomberg) -- Shanghai aluminum fell after London prices erased a more than 5 percent gain to a record as rising global supplies eased concerns about output cuts in China.

Inventories tracked by the London Metal Exchange rose to 1.09 million tons yesterday, near the highest in more than four years. The price contango between London cash and three-month prices widened to $49.25 a ton. Contango, a situation when cash prices are lower than futures prices, usually indicates supplies exceed demand.

``Chinese output cut due to power issues could be too small to alleviate a global surplus,'' Wang Zhouyi, an analyst at China International Futures (Shanghai) Co., said today by phone from Shanghai. ``Before any noticeable change in London's contango market, further price gains will be capped.''

September-delivery aluminum on the Shanghai Futures Exchange fell as much as 1.8 percent to 19,380 yuan ($2,826) a ton, and traded at 19,540 yuan at the midday break. The metal has gained 9.7 percent this year.

Aluminum for delivery in three months on the London Metal Exchange rose 0.6 percent to $3,165 a metric ton at 12:21 p.m. in Shanghai. The contract fell as much as 5.7 percent yesterday, giving up all of its gains to a record $3,327 a ton July 7 after CRU International Ltd. said it estimated output cuts because of power outages in China's Shanxi province were only 100,000 tons.

The fact that Shanghai aluminum was relatively unmoved compared with the LME gains on July 7 could mean the reaction in London to the Chinese cut-backs was not justified, John Reade, an analyst at UBS AG, said in an e-mailed report.

No Scarcity

``We don't see any immediate scarcity of aluminum nor any shortage of smelting capacity,'' said Reade. Any production interruptions ``would have to be protracted to lead to genuine tightness and scarcity of this metal, especially with demand currently soggy.''

Aluminum, used in construction and cars, has rallied 31 percent this year after power shortages in China, the world's largest producer, and South Africa curbed output. Power accounts for between 30 and 40 percent of operating costs for smelters.

The metal would be ``balanced'' in 2008 because of rising demand, compared with a previous forecast for a surplus of about 700,000 tons, according to Rio Tinto Group's aluminum unit.

The Shanxi provincial government ordered smelters to pare capacity to ensure power supplies for farming, Wang Suomin, a manager at the Shanxi Huaze Aluminum & Power Co., said July 7. The venture has an annual capacity of 280,000 metric tons.

Among other LME-traded metals, zinc gained 1.4 percent to $1,790, lead advanced 1.8 percent to $1,660, copper rose 0.3 percent to $8,225 a ton, nickel rose 0.7 percent to $20,750, and tin was untraded in Asia after settling at $22,450 yesterday.

Expectations for more Chinese imports of zinc and lead on price differences would support the London market in a near term, said China International's Wang.

To contact the reporter for this story: Li Xiaowei in Shanghai at Xli12@bloomberg.net