Aluminium prices should improve slightly this year, despite an expected surplus of the metal and the likelihood of overproduction in the years ahead, Deutsche Bank said in its quarterly commodities review.

Aluminium posted a spot return of about zero last year, the bank said. The aluminium market is in contango, when the price of a forward or futures contract trades above the current spot price.

Deutsche Bank said the normal price signals for aluminium were being distorted by so-called financing deals, which involve speculators warehousing the metal and entering forward selling contracts.

Such deals in part reflect extremely low interest rates in Europe and the United States. With very low interest rates, market players can sell forward aluminium at a higher price than the costs involved in keeping it in a warehouse.


"In our view the participation of the financial market is responsible for the mispricing of aluminium," Deutsche Bank said. "Under normal circumstances excessive oversupply would result in falling prices and force closure of uneconomic capacity, thereby rebalancing the market.

"This is not happening."

One-third to half of the world's aluminium smelters - New Zealand's Tiwai Pt included - are estimated to be operating at a loss.

Since 2008, the aluminium market has generated a cumulative surplus of nearly nine million tonnes. Deutsche Bank expects the market to be in surplus by about 1.3 million tonnes in 2013 alone.

"Nevertheless we believe that the average price will be modestly higher year-on-year, a function of stronger physical demand conditions in the Western world."

The bank expects supply growth could exceed 6 per cent in 2013, taking production over 50 million tonnes.

Prices look set to play a big part in the future of New Zealand Aluminium Smelters' Tiwai Pt smelter, near Bluff, and will feature in the Government's thinking as it prepares power generator Meridian for partial privatisation. NZAS consumes around 15 per cent of the country's power.