China's ability to expand output is expected to offset strong global demand to keep aluminium stocks above critical levels and prices tracking slowly downwards through 2008, Macquarie Research said.

In an industry review released Monday to coincide with this week's CRU aluminium conference in Montreal, Macquarie forecast the metal's cash price, currently around US$2,500 a metric ton, to average US$2,645/ton this year, easing to US$2,315/ton next year and to US$2,094/ton in 2008.

"Overall, we would expect prices to be held in a fairly narrow band over the next two-to-three years – a relatively unexciting outlook when we have other metals which have, or are looking likely to, run out," Macquarie analysts said.

As zinc inventories head toward critically low levels, aluminium stocks have remained at relatively comfortable levels, explaining why aluminium prices have doubled over the past five years compared with a fivefold increase in copper prices for example.

Macquarie expects the market to post a deficit this year, then go into balance from 2007 thanks to the increasing availability of alumina and the existence of large amounts of idle smelting capacity, particularly in China.

"With spot alumina prices coming down rapidly, Chinese producers can justify exporting at lower prices than was previously the case, suggesting that the market-clearing price for aluminium is likely to fall over the next year."

China's net exporter status has been a major factor in aluminium's under-performance relative to other base metals.

However, Macquarie said the downside for aluminium prices seems limited given stocks are still historically low and power costs for some smelters continue to rise dramatically.