BEIJING, Nov. 23 -- Aluminum prices will be supported for the next three years by rising production costs in China, the biggest producer, and a recovery in global demand, Macquarie Securities Ltd. said.

    The aluminum market may expand to between 42 million and 45 million metric tons by 2012, analysts led by Jim Lennon said in a note today, without giving a comparison. Higher input costs and a potential appreciation in the Chinese yuan will support prices, the brokerage said.

    China last week raised power prices, which account for about a third of aluminum output costs, to help utility companies curb losses. Aluminum prices, lagging behind other metals, may rise as producers including Aluminum Corp. of China Ltd. pass on costs, Essence Securities said Nov. 20.

    "The main potential upside risk to aluminum prices over the next 2-3 years is the potential for increases in the marginal cost of production," the analysts said.

    Aluminum for three month delivery on the London Metal Exchange rose 0.1 percent to $2,062.50 a ton at 10:16 a.m. Beijing time. The metal has gained 34 percent this year. In Shanghai, the price gained 0.7 percent to 15,755 yuan a ton at 9:55 a.m.

    Macquarie's call comes as Barclays Capital and Bank of America Merrill Lynch highlighted growing inventories and output gains of the metal used in airplanes and packaging. Macquarie's analysts also said there are concerns over inventory and production growth in China.

    Chinese Stocks

    Chinese aluminum stocks have risen to 520,000 tons as of Nov. 19, more than doubling from the first quarter, Macquarie said. Capacity utilization at Chinese smelters may rise from 80 percent in the period to the Lunar New Year next February. It may gain through 2010 "meet an anticipated continuation in strong growth in Chinese demand," the analysts said.

    Barclays Capital forecasts that the global surplus in aluminum will increase 29 percent to 1.63 million tons next year as the biggest annual price increase since 1994 spurs output.

    China's National Development and Reform Commission, the country's top economic planner, raised power prices by 0.028 yuan per kilowatt-hour last week. That will add about $60 a ton to higher-cost aluminum producers, giving them a total output cost of $2,050 and $2,100, Macquarie said.

    About 55 percent of Chinese aluminum smelters are running their own power equipment and aren't affected by the power tariff increase.

    Alumina, carbon anode and coal also contribute to the cost of making the metal. Alumina is a semi-finished raw material.

    (Source: Bloomberg)