Aluminium recovers from 4-1/2-month low as dollar dips

Aluminium steadied on Tuesday, after touching four-and-a-half-month lows the previous day, as the dollar fell, but analysts expected more losses due to an overhang of inventories and to speculators adding short positions.

Relative-value trades have been popular this year, including shorting aluminium and going long on copper, analyst Robin Bhar at Societe Generale said.

"From a tactical point of view, certainly for the year-end, going long copper and shorting aluminium is paying dividends. It's definitely a trade that is working," he said.

In the last week to Monday, copper gained about 2 percent, while aluminium shed around 1 percent.

"That could be a reason why we are seeing copper and aluminium going their own ways. Some of those trades are being put on because copper hasn't gone into surplus yet on a tangible basis and aluminium is still plagued by oversupply," Bhar said.

London Metal Exchange (LME) three-month aluminium closed at $1,773 a tonne from $7,774.50 on Monday. It fell as low as $1,768 a tonne on Monday, the lowest since July 5.

Aluminium open interest on the LME rose by 8,082 lots on Monday MAL-OI-TOT, which combined with the lower prices, implied that fresh short positions were added.

"Aluminium, of all the base metals, is facing some of the bigger headwinds given all the supplies tied up in warehouses and the new proposed changes in LME rules," said James Glenn, an economist at National Australia Bank in Melbourne.

"It's probably the majority view that you're going to get an increase in physical supply. At the moment that is driving prices lower," he added.

LME stocks of aluminium at 5.4 million tonnes are within reach of record highs, with similar volumes estimated to be held outside exchange inventories, built up in the wake of the 2008 credit crisis. MALSTX-TOTAL

But LME aluminium has not been freely available to the market due to investor holdings and because of huge bottlenecks that have delayed delivery by a year or more in some locations.

The LME, the world's biggest industrial metals marketplace, announced a tougher warehouse policy earlier in November to cut queues for delivery to a maximum of 50 days from over a year in some cases, after persistent complaints and a string of lawsuits from metal buyers.