Power worries push aluminum to new record

LONDON (Reuters) - aluminum rallied five percent to a fresh record on Monday as investors bet on higher prices of the energy-intensive metal amid escalating worries over power problems in the world's biggest producer, China.

The metal used widely in packaging, transport and power jumped to $3,327 a tonne, exceeding a previous record high of $3,310 per tonne in May 2006. Three-month aluminum MAL3 closed at $3,310 a tonne on the London Metal Exchange, up $142 from Friday.

The rise was triggered by aluminum Corp of China (Chalco) (2600.HK) (601600.SS), which said the firm's two aluminum smelters -- with combined capacity of 500,000 tonnes -- in Shanxi province had tight power supplies.

Chalco also said that it had not had a big impact, but the news reminded the market about the fragility of power supplies in the country, which is also the world's largest consumer.

Analysts estimate up to 45 percent of aluminum smelting costs are accounted for by electricity. Rising power prices, shortages and disruptions have boosted aluminum since January when severe winter weather hit Chinese output.

"This is not surprising given the threat to supply," said analyst David Thurtell at BNP Paribas. "While stocks are rising and not as critically low as for copper, a significant slowdown in Chinese output would quickly leave the rest of the world short of aluminum."

Inventories of aluminum in LME warehouses currently stand around 1.08 million tonnes -- enough for more than 10 days of global consumption. Thurtell said such a Chinese slowdown could take aluminum to $4,000 per tonne at sometime in 2009.

Reinforcing concern was news that coal shortages have led to record power shortfalls in northern China's Shanxi province and the coal-rich region had to ration supplies and even import electricity from Beijing to reduce deficits.

"The risks to aluminum supply are price supportive over the next 2-3 months," JPMorgan said in a note.

"But this needs to be taken in the context of a market currently over-supplied, and showing robust production growth due to new capacity and attractive margins."

China's aluminum smelting capacity is expected to reach 15 million tonnes by the end of the year compared with about 12 million tonnes in January, analysts say.

DOMINANT CHINA

Copper MCU3 ended at $8,412 a tonne from a session high of $8,590 and compared with $8,470 a tonne on Friday. The metal used in power and construction is down nearly 6 percent since hitting a record high of $8,940 last week.

Some of copper's gains can be attributed to analysts expecting China, the world's top copper consumer, to take up the slack in demand created by the housing market crash in the United States, the world's second largest consumer.

"While China is a dominant factor, the US is still important to the outlook for commodity markets both directly through its own demand, and indirectly through its impact on the rest of the global economy, decoupling notwithstanding," Standard Chartered said in a note.

A fair proportion of the copper price rise is down to investors using it as an alternative investment to the dollar and stocks and shares, in much the same way they use gold.

But the dollar is stronger against the euro and that will weigh on base metals, which are priced in dollars and so become more expensive when it rises.

The other negative is a seasonal lull in metals demand as consumers shut down operations for maintenance and repair.

"We're moving into a traditionally quiet period. We could see some profit-taking in LME copper," a London trader said.

He added that short -- bets on lower prices -- position covering could help zinc MZN3 prices spike up.

Last week the metal used for galvanizing steel fell to $1,750 a tonne, its lowest since December 2005 as funds sold on expectations of rising supplies and stocks.

Zinc MZN3 was up at $1,840 a tonne from $1,780 on Friday, lead gained to $1,630 from $1,565, nickel MNI3 was at $21,000 a tonne from Friday's last bid at $22,400 and tin MSN3 was at $22,750.

(Additional reporting by Humeyra Pamuk and Anna Stablum, editing by Peter Blackburn, David Evans)