- Aluminium prices broke higher last week and have set a fresh high at $1,981 per tonne. New highs have prompted fresh selling that prices must now absorb.
- Given the strength of the trend, we see this pullback as likely to be short-lived.
- A look at the monthly chart (inset) shows a steady upward trend. It also shows that the rally may have only just started – there is a lot of room on the upside.
- We said recently that we would expect dips to be well supported so we would avoid getting too bearish. Still, we also said we would see any dip as leading to another buying opportunity, which seems to have been the case. We would now look for prices to challenge the highs and move on to challenge supply in the $2,000-2,120 per tonne range.
LME stocks are below two million tonnes at 1.85 million tonnes and available metal is just above the one-million-tonne level at 1.01 million tonnes.
Over the years there has been a lot of talk about massive tonnages being financed off-market. If exchange stocks continue to fall at the current rate, some of the off-market stocks may well need to come onto exchanges to provide liquidity.
Stock inflow into LME-registered warehouses has dropped off. There were only two deliveries in March, totalling just 2,975 tonnes, while net outflow since the start of March has averaged 13,638 tpd compared with an average of 4,075 tpd in February.
The cash/three-months spread is not moving much. It was recently quoted at $13.5-11.5 per tonne contango.
Nearby-dated metal remains in concentrated hands. One entity now holds 40-49% of the warrants and similarly sized cash positions, while one holds tom positions equivalent to 30-39% of the warrant position.
April option declaration is upon us. There has been some reduction in exposure to $1,950 strike calls – open interest (OI) has eased to 1,837 lots from 2,074 lots early last week. There is, however, significant OI on the $2,000 strike calls; the latest data (for Monday) shows 7,880 lots. OI on $1,900 puts was recently at 1,398 lots. With cash prices at around $1,945 per tonne, a dash to $2,000 seems less likely now, which could lead to some unwinding of delta hedges as the morning progresses.
The physical market is quieter as buyers balk at the idea of buying basis a high LME price combined with recent higher premiums, especially given the rise in the Japanese premius. Higher prices have also attracted more scrap into the market.
The upward trend looks bullish as does the LME stock data but the fundamentals look less so; we wait to see if the firmness in LME aluminium mobilises more of the off-market aluminium stockpiles. But with the spread not showing tightness, there may be little incentive for that yet. For now we would stick with the strong upward trend.