- Aluminium’s three-month prices started to rally last week and ended Friday above the 20 DMA and back above the former UTL.
- With a double top still hanging overhead and with the recent low breaching the November low, the series of lower highs and lows suggests a possible downward trend. This rebound could merely be a counter-trend move to the upside.
- A move above $1,733 per tonne would be needed to negate the market’s current vulnerability.
- The stochastics have crossed higher, which is providing some bullishness to the chart – we would wait to see if prices can regain upward momentum.
Prices are trying higher. We wait to see if prices can move up above $1,733 per tonne, which could start to look constructive.
Our lingering concerns about the aluminium market remain. First, aluminium supply has a habit of being price-elastic. Second, tighter spreads could see off-market metal return to the market. Both concerns have started to manifest themselves: the latest IAI data release showed China’s aluminium production rebounded in November and LME stocks are seeing some large deliveries into warehouses, although the last was on January 4.
Stocks set a low of 2.07 million tonnes on December 12; since then there have been eight large deliveries into warehouses – ranging from 14,775 tonnes to 34,050 tonnes – that have taken stocks to 2.22 million tonnes. The backwardation may well lead to more of the same; given how much metal is believed to be financed off market, there is the potential for a lot more metal to show up should financing the metal off-market not be profitable. A combination of backwardations and higher interest rates could make financing more difficult. Still, the recent inflows may have simply been some year-end book-keeping – we wait to see if there are further large increases in the days and weeks ahead.
The cash-3s spread has eased slightly to a backwardation of $6.5-8.5 per tonne, in from 9.25-11.25b per tonne on January 4 and from $14.0-14.5b per tonne in the run-up to New Year. Most of the tightness lies between cash and the January date. The forward curve is in contango, with 3m-15m at $28 per tonne.
There are some large holders of nearby metal; as of Friday January 6’s data, one entity held 50-79% of the warrants and ‘tom’ and cash positions of a similar size.
The nearby tightness in the spread and the large holdings of nearby positions may well mean those shorts with January prompts struggle to cover. Five large shorts collectively hold 40-66% of the January opening interest, which in turn stands at 83,609 lots – some 2.1 million tonnes. This compares with 1.56 million tonnes of available stocks in LME-registered warehouses.
As long as the surplus aluminium can continue to be kept off market, the fundamentals are fairly constructive – a stronger economic outlook should be bullish for aluminium demand. The question is whether the off-market stock can be kept off market given narrower spreads and the prospects for higher interest rates.
The charts have recently turned more bearish – this may well have been prompted by the pick-up in LME stocks – so we now wait to see if the inflow of stocks was related to the end of the year or a sign that metal was shifting from off-market to on-market because financing was becoming too costly. If the latter scenario develops, the double top on prices may well be warning of further weakness ahead.