Montréal –(Kitco News) --Aluminum prices are expected to trend mostly sideways until year’s end as financing deals limit the amount of metal in storage that is available to users, even though industry watchers anticipate a market surplus this year of 1.5 million to 2 million metric tons.

“I don’t think we’re going to do very much over the next few months. Probably stay within a trading range of $2,000 to $2,300 until the end of the year,” said Edward Meir, senior commodity analyst at MF Global.

Three-months aluminum on the London Metal Exchange closed Thursday at $2,082.50 per ton. It has spent most of the last month in a range of $1,905 to $2,216 per ton.

The 2008 financial crisis severely affected industrial demand. Aluminum is heavily used in the construction and transportation sectors. For instance, automakers are increasingly using aluminum to make vehicles lighter and improve fuel efficiency. The metal is also used for packaging, namely cans.

As demand fell, the amount of aluminum stored in LME warehouses hit a record 4,640,750 tons on Jan. 21. Since, they have fallen to 4,410,800 tons as of the end of business Thursday.

“There’s obviously a lot of inventory on warrant and that’s going to keep things a bit in check on the upside, but by the same token, we don’t know how much is free and not tied up in financing deals,” said Meir.

Normally, high supplies hold back prices. But in this case, not all of the metal in warehouses is available to be shipped to potential users because of financing deals. Essentially, metal is being used as collateral, meaning it must be kept in inventory for the duration of a loan, although can be sold on a forward or futures basis. The end result is that it cannot be used immediately, tightening the spot market.

“Two years ago, when the financial crisis started, industrial demand dropped by 30-40%. All that material that was around was stored in warehouses, which was eventually financed by banks and other entities in deals which lasted maybe one year or two years,” said Herwig Schmidt, head of sales at Triland Metals.

Otherwise, despite a soft economy in Western nations, there are signs of life in some sectors, such as the automobile industry, that were heavily affected because of the financial crisis, said Bart Melek, global commodity strategist with BMO Capital Markets.

China saw its automobile production rise by 15.67 percent year on year in July while automobile sales increased by 14.42 percent during the same period, according to the China Association of Automobile Manufacturers. However, both production and sales dropped significantly from May’s figures.

Some positives are starting to emerge for the European auto sector, which otherwise had a rough year.

“If you look at the figures from EU car producers, especially luxury cars, they have very good numbers. BMW and Audi have added extra shifts for production because there is good demand for bigger cars,” said Schmidt.

Recent data from U.S. car manufacturers showed year-on-year declines, but this was largely because of a difficult comparison to year-ago sales, which were helped by the extra demand created by the U.S. Cash for Clunkers program, analysts said. This was the Car Allowance Rebate System, which was a U.S. government program encouraging car owners to trade in older model cars for newer fuel-efficient models. The program was a means to raise auto sales subsequently boosting the economy.

“Last month’s data is a bit misleading. Take out last month’s year-to-year comparison and sales are rising, not as sharply but still rising,” said Meir.

Industry experts believe that demand for aluminum will remain consistent as the economy continues to recover.

“We’ve all talked about slow recovery, but the fact of the matter is compared to about a year ago, things are materially better than they were and demand of the results should benefit,” said Melek.

By Alex Létourneau of Kitco News aletourneau@kitco.com

Editor’s Note: Meet the Kitco News Team at the upcoming Kitco Metals eConference September 12-13, 2010. A not-to-be missed event featuring Ron Paul, Marc Faber and other industry heavyweights. The eConference is free with Pre- Registration www.kitcoeconf.com.

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