Aluminium expected to hit $3,000 a tonne by year-end

London: Aluminium prices may rally back to $3,000 a tonne on the London Metal Exchange (LME) by year's end as investors who bet on falling prices buy back their positions.

The glow is off metals, which peaked in May with record highs for aluminium as well as copper and zinc.

Slowing economic growth and other macroeconomic concerns have since kept a lid on prices, but analysts say aluminium, along with some other metals, has another shot at hitting $3,000, despite growing investor wariness about commodities.

"Aluminium has one last chance, along with other base metals, for a push higher before slowing macro-economic concerns erode investor enthusiasm too far," UBS analyst Robin Bhar said.

On Tuesday benchmark aluminium futures on the LME traded at $2,540.

On May 11, the metal prized for its light weight and corrosion resistance, hit a record peak of $3,310. Copper and zinc hit records on the same day.

A source at a London-based fund said negative sentiment towards aluminium since June had prompted some investors to bet on falling prices, known as going short, but they were now buying back those positions to minimise losses after the market steadied above $2,400.

That buying, or covering, tends to amplify rallies, driving prices even higher.

"Some large outstanding short positions remain. I think some of those are being unwound...and there is potential for more short covering," the fund source said. But an LME dealer said aluminium would struggle to get back to record peaks.

"I would not be surprised to see aluminium firmer again, but $3,000 is probably just too high. Fundamentally there just isn't the support," he said.

Analysts said open interest outstanding contracts for settlement around December 20 had ballooned, suggesting sentiment had reversed and investors anticipated higher prices.

"Open interest on the December prompt date has been rising sharply over the last month or so," Sempra Metal economist John Kemp said.

According to London Metal Exchange data, the discount for cash metal versus the three-month prices, also known as contango, has shrunk from $50 to around $30 over the past two weeks.

Within that spread, metal for December delivery is trading at a premium, or backwardation, of $8 a tonne above the price for delivery in January. Last week the backwardation flared to $20.

A market in backwardation is usually associated with tight supply.

"The additional interest opened on the December 20 prompt during the course of the last four weeks, 840,000 tonnes, is more than the entire LME stock, so it is possible that the market could become very tight," Kemp said.

Aluminium stocks in LME-monitored warehouses are around 693,000 tonnes or 7.6 days of consumption and have been falling since peaking in March at around 780,000 tonnes.

"The market is nervous a very large dominant position is emerging just before the end of the year and will cause a sharp spike in both prices and the spread during the month of December," Kemp said in London.