BEIJING, Apr. 19 -- China is producing too much aluminum, contributing to a soft local market and helping to undermine London Metal Exchange prices, Standard Chartered's Dan Smith said in a recent research note.

The bank expects Chinese aluminum supply to outpace demand in the years ahead, Smith said in Friday's note.

Aluminum output in China rose 46% on year in the first two months of 2010, significantly faster than the 36% rise in output of fabricated aluminum products, which is a proxy for aluminum demand, during the same period.

Further weighing on prices, China's government still holds about 590,000 metric tons of aluminum in stockpile programs and provincial governments also hold "substantial amounts," he said. The Shanghai Futures Exchange has seen 97,000 tons of aluminum flowing into its warehouses so far this year, for a current total of 394,000 tons.

"We expect aluminum prices to trend lower during the next few years," Smith wrote. "The biggest headache for existing producers will be the expansion in smelter capacity taking place in a number of Asian countries."

LME stocks are another low-cost source of supply and a downside risk to prices over the medium term, Smith said, adding that prices, however, aren't likely to collapse.