1. Dollar to Euro exchange rate
2. Primary aluminum production
3. China export volumes
4. Midwest (MW) Premiums
5. Capacity utilization
6. Oil prices
7. European & Japanese premiums
8. China GDP & PMI data
Aluminum continued to fall throughout June closing at $1,686/mt, a 3+% decline from our previous monthly report and just above key support levels. The back-story remains exactly the same as one month ago in terms of global oversupply, falling MW premiums and the potential return of the stock and finance trade. What has changed are some of the details within each of these drivers. None have fundamentally changed the monthly outlook.
It’s All in the Output
World production of primary aluminum has grown 12% from one year ago. This is the fastest growth rate since 2011. The notion that China will curb production remains a pipedream. In fact, global producer UC Rusal pointed to rising Chinese aluminum exports as evidence of no checks on Chinese aluminum production. Combine that with a new “Make in India” campaign and we see a similar situation developing there – more capacity. The bottom line: aluminum prices may need to fall further and it will be the non-Chinese producers that take out capacity.
Watch the MW Premiums
Last month this report indicated the conditions appear “ripe” for the stock and finance trade – a strong forward curve combined with low interest rates may be all that is needed to soak up excess inventory and re-start the warehouse trade. MetalMiner analysis of LME data, however, suggests that total tonnages stored in Detroit warehouses are indeed declining meaning we don’t yet see any evidence of the return of the stock and finance trade. Nevertheless, aluminum buying organizations will want to pay close attention to this development.
In the meantime, semi-finished aluminum prices are under pressure. Physical delivery premiums have come down nearly to their historic levels of $100-125/ton and mills are short of work so the conversion premium is under considerable pressure. In Europe, a weak Euro is helping mills export but there is limited demand placing downward pressure on prices.
Metal prices are falling across the board, and some of them have already fallen below key support levels. Based on current market conditions, it’s likely that aluminum prices will keep trending lower. Therefore, making long-term commitments is not a good idea until we see real signs of strength. We do, however, leave open the possibility of rising premiums as an indicator of the resumption of the stock and finance trade.
So What Should My Industrial Buying Strategy Be?
This aluminum price forecast was excerpted from our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds, consult the July 2015 report!