Aluminium prices touched two-month highs overnight as hopes for stronger demand in top consumer China buoyed sentiment, but an oversupplied global market and large surpluses are expected to cap gains.

Benchmark aluminium on the London Metal Exchange (LME) was up 0.8 per cent to $US1,537 a tonne at 1700 GMT.

Prices of the metal used widely in the transport and packaging industries earlier touched $US1,538.50 a tonne, the highest since March 30.

“More aluminium is being produced than consumed,” said Julius Baer analyst Carsten Menke. “Demand from key manufacturing sectors like autos will come back only gradually and output cuts to balance the market are not really happening.”

Falling costs of inputs such as power, alumina and carbon have allowed aluminium smelters to keep producing, despite low prices and losses.

Expectations of stronger aluminium demand as industrial activity ramps up in China have helped to buoy prices on the LME and on the Shanghai Futures Exchange since early April.

Aluminium stocks in warehouses monitored by ShFE have dropped nearly 40 per cent since the middle of March to about 322,000 tonnes.

However, stocks in LME-registered warehouse have climbed more than 50 per cent to more than 1.49 million tonnes over the same period.

Aluminium needs to hold above the 50-day moving average at $US1,520 for a sustained period before another upside attempt, which faces resistance at $US1,5445, a Fibonacci retracement level.

The premium for the cash contract over three-month tin is at an elevated $US188 a tonne, indicating concern over nearby supplies on the LME market.

Low LME stocks and large holdings of warrants and cash contracts are behind those worries.

Three-month tin was up 1.3 per cent at $US15,500.

Copper was up 1.6 per cent at $US5,345.50, zinc added 0.8 per cent to $US1,936, lead dipped 0.4 per cent to $US1,631.50 and nickel was up 1.1 per cent at $US12,250.

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