LME aluminum

While industrial metals started 2019 in an upward trend, the complex showed weakness as 2019 progressed.

In fact, all of the industrial metals hit down around current support levels — and lower at times — during the past few weeks.

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With industrial metals down across the board, are we moving into bear market territory? Or have we witnessed a temporary blip resulting from less certain macroeconomic conditions?

To examine the situation in more detail, let’s have a look at some of the key industrial metals and recent prices.

The DBB Trended Back Down to Mid-January 2019 Values

After a bullish start to the year, the DBB peaked on a short-term basis in early April, then trended back down once more.

Compared with July 2018’s larger drop, this one appears milder, but the short-term downward trend remains.

Source: MetalMiner analysis of NASDAQ.com data

The DBB tracks three key industrial metals: aluminum, copper and zinc. Let’s take a look at each metal to assess price performance using the LME 3-month futures price.

LME Aluminum

Looking at weekly trading volume, it looks like the downtrend in price is played out (based on recent positive trading volume). Also, both positive and negative weekly volumes looked weak recently, with a lack of momentum in prices.

Source: MetalMiner analysis of Fastmarkets.com

This indicates continued sideways movement on the LME aluminum price.

Given that the aluminum market moved largely sideways during the course of 2019, the Moving Average Convergence/Divergence (MACD) can also indicate where the market is at this time.

The MACD tracks the difference between two exponential smoothed moving averages (using the 12- and 26-day averages); it’s the black line in the graph below, which sits along the bottom edge below the price line. The red line, or signal line, uses the nine-day exponentially smoothed average of the MACD.

Source: MetalMiner analysis of Fastmarkets.com

When the values hold above zero, this indicates the market is overbought. When they are below zero, this indicates the market is oversold. If the lines continue to trend downward, then the downtrend is still in process.

By this indicator, the aluminum market looks oversold and a buy signal emerged recently when the longer-term line turned up after a couple of days of upward market momentum and edged past the signal line. The signal line followed a day later, indicating the downtrend lost steam.

Based on this analysis, aluminum prices may have already hit bottom and turned around; therefore, the aluminum market itself does not look bearish at present.

LME Copper

LME copper prices lately have showed clear weakness. However, they found support again recently in daily trading, stopping a further slide in price.

With negative trading volume still registering on a weekly basis, the price dynamic for copper still looks weak.

Source: MetalMiner analysis of Fastmarkets.com

Looking at volume on a weekly basis, we can see that it trended up again last week. Through the first few days of this week, volume registered as negative on the partial week’s data.

Copper prices still look weak.

LME Zinc

Like the other industrial metals, LME zinc prices trended downward in April.

Looking at weekly volumes for zinc, the price action looks mixed. (Note that the last bar shows only partial data for the week in progress.)

Source: MetalMiner analysis of Fastmarkets.com

Given the clearer trend when looking at LME zinc prices, we can use the 4-9-18 day moving average analysis to assess the state of the current downtrend. The result of the analysis shows the downtrend remains in process as the moving averages queue in the expected order, with the 18-day average on top (blue line), followed by the nine-day (purple line), then the four-day average (red line).

Source: MetalMiner analysis of Fastmarkets.com

Therefore, in the case of LME zinc (using this method) the downward trend continues. The red line, however, the shortest average and therefore most sensitive, has recently shown signs of turning back up.

Source: MetalMiner analysis of Fastmarkets.com

Looking at a MACD analysis, based on the 12-, 26-, and nine-day periods, the downtrend continues with the signal line in red sitting above the MACD line in black, while both continue in a downward trend below the zero point of the MACD indicator bar.

Readings below zero on the indicator show bullishness in the sense that prices may turn around. However, in this case the lines continue moving in a downward trend, so we may not have seen the bottom of zinc prices just yet.

What this Means for Industrial Buyers

During recent weeks, the main industrial metals tracked by MetalMiner showed weakness. Will this be temporary or are we looking at a more cyclical movement into bear market territory?

While aluminum prices look relatively stable, copper and zinc prices appear weaker, with no clear signal given that the downturn has passed.

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Therefore, while it’s too soon to call a bear market, it’s also too soon to say we’ve avoided one.

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photonewman/Adobe Stock

This morning in metals news, the LME aluminum price has tracked back down after spiking last Wednesday, U.S. steel import permit applications fell in September and a Chilean state-owned miner is in talks to sell copper to China’s Minmetals.

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LME Aluminum Hits One-Week Low

The London aluminum price has come back down after surging last week, when news of Norsk Hydro’s decision to shut down its Alunorte alumina refinery sent prices rising.

However, after being granted a permit to use new technology related to waste disposal at the refinery, Alunorte is set to resume operation, Reuters reported, and the aluminum price has retraced to a one-week low.

MetalMiner’s Take: LME aluminum prices decreased, falling again to their previous levels.

Alumina supply concerns moved the LME aluminum price out of its price range. Despite the sharp downtrend, LME aluminum prices do not seem to be in a bear trend. Selling trading volume does not support the downtrend in prices, meaning that prices are just retracing.

LME aluminum prices seem less volatile than other base metals, but they react sharply to news of supply concerns.

Steel Imports Down 10.6% in YTD

U.S. steel imports have dropped 10.6% in the year to date, the Times of Northwest Indiana reported (citing American Iron and Steel Institute data).

According to the report, September steel import market share hit 21%.

Codelco in Talks for Copper Supply Deal with Minmetals

Chilean state-owned miner Codelco is in talks to enter into a copper supply deal with China’s Minmetals, Reuters reported.

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According to the report, the miner is in talks to enter a three-year supply deal with the Chinese firm, providing 60,000 tons of copper per year.

Wondering why aluminum prices have pulled back from highs of $2,200 per metric ton on the LME?

After all the hype about environmentally driven smelter closures in China this year and the additional curtailments to be forced on the market in certain provinces during the winter heating seasons, most were expecting the run up in prices to hold steady (at least during the winter period).

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In practice, although prices have made impressive gains from lows of $1,700 per ton earlier this year to five-year highs of over $2,200 per metric ton, it was largely on the pretext of constrained primary metal supply that it is beginning to become apparent is not happening.

According to China’s National Bureau of Statistics (admittedly not the most reliable of sources) Reuters reports China’s aluminum smelters churned out 2.35 million metric tons of the metal in November, down 7.8% from 2.55 million tons in October and down 16.8% from a year ago.

In reality, while headline smelter capacity has been closed, new planned capacity has continued to quietly come onstream.

Read more

The London Metal Exchange aluminum price has risen steadily since this time last year and seemed at times like it may hit, if not breach, $2,000 per metric ton. Many consumers are asking how much further does it have to go? will it break that psychologically important barrier anytime soon? and if it does, how much further does it have to go?

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To understand this, we should consider what has caused price strength in recent months and that you will not be surprised to hear is easy to list, but harder to judge to what extent each factor has had an impact.

Why is Aluminum Up?

First, there are general commodity category price drivers, nearly all base metals have shown price strength over the period as industrial demand has remained positive and surplus supply markets have either tightened or gone into outright deficit. In the case of aluminum, there are several indicators suggesting the market deficit has increased over the last 12 months. Physical delivery premiums have increased not just in Asia, but in the U.S. with the Midwest premium currently trading just below ten cents per pound on the CME Group exchange, up from six cents per pound in the third quarter of last year. Japanese physical delivery premiums have been agreed at $128 per metric ton for the second quarter up from $95 per ton for the first quarter.

Source: Reuters

Meanwhile, LME inventory continues to decline with almost 400,000 mt electing to leave the system in February alone. Now it must be said that not all this metal is destined for consumption, as Andy Home in a recent Reuters article points out, the majority of metal leaving the LME system is almost certainly heading to off-market lower cost storage options. Read more

reuters_LME_Aluminum_support)82316_550

Source: Reuters.

LME aluminum has found its support level.

Three-month Aluminum on the London Metal Exchange hit a new 13-month high this week, retaking the $1,700 level.

3M LME Aluminum hits 13-month high

Three-month LME Aluminum hits 13-month high. Source: MetalMiner analysis of Fastmarkets data.

Recently we talked about the decline in aluminum exports this year. China exported 390,000 metric tons of unwrought aluminum in July, down 9.3% from July of last year. Chinese aluminum exports have fallen around 7% for the first seven months of 2016. Lower aluminum exports are supporting aluminum prices this year.

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Despite the fall in exports, the U.S. is considering asking for a reclassification of aluminum products to stop a flood of “fake semi-finished” aluminum products entering the global market. The reason is that Chinese aluminum exporters seem to be avoiding export duties while simultaneously qualifying for Chinese export subsidies for semi-finished products, for products that are being shipped specifically for remelting as unwrought.

The proposal is still in draft form and must be approved by the World Customs Organization before it could come into effect, a change that is unlikely before next year, if at all.

Weaker Dollar

One macro factor contributing to the rise in aluminum price this month is a weaker dollar since late July. Aluminum, like any other dollar-denominated asset tend to move in opposite directions to the dollar. The dollar rose as the pound sank following U.K.’s vote to leave the EU, but the pound stabilized in recent weeks.

US Dollar Index falls since late July. Source: MetalMiner analysis of stockcharts.com data

The U.S. dollar index falls since late July. Source: MetalMiner analysis of @stockcharts.com data.

In addition, expectations that the Federal Reserve would raise rates this year combined with easier monetary policy elsewhere would make the dollar more attractive to yield-seeking investors, but things are going the other way. The Fed is not raising rates and countries like Japan are not easing monetary policy as much as investors had expected. Consequently, the U.S. dollar has fallen, giving a boost to dollar-denominated assets such as aluminum.

Oil Prices Rebound

Oil rebounds in August. Source: stockcharts.com

Oil rebounds in August. Source: @stockcharts.com.

Finally, a rebound in oil prices in August is a good sign for increasing aluminum prices. Oil is not just a commodity, itself, but an asset closely followed by commodity investors. Rising oil prices lure investors into commodities and, of course, industrial metals.

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Also, oil is the main benchmark for energy prices. Lower energy prices mean lower transportation costs and lower production costs, especially for those energy-intensive metals like aluminum.

 

aluminumingots_500We’ve reported on Alcoa‘s production declines affecting aluminum prices and physical premiums, but there is even more to look at for those investing in firms like Alcoa, Rio Tinto Group and Norsk Hydro – notably, the London Metal Exchange‘s aluminum inventories.

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In short, LME’s aluminum inventory has been steadily dropping after reaching about 5.5 million metric tons in mid 2013. According to Market Realist, that drop was compounded in October with aluminum inventory at LME warehouses down 138,900 mt.

As of this week, LME warehouses recorded a total aluminum inventory of 3.03 mmt, according to the news source, of which nearly 36% is from canceled warrants. All the metal that enters LME warehouses is on warrant and these warrants are canceled when the bearer requests the physical delivery of the metal.

From late October through Nov. 2, canceled warrants grew by more than 23% despite total aluminum inventory with LME warehouses decreasing over the same period.

Leon Westgate, an analyst at ICBC Standard Bank, told Bloomberg: “(The increase in canceled warrants is) unlikely to be related to real demand. With the large tonnages like that, it’s likely to be finance-related. It’s likely to be material moving to an ex-LME location.”

Forming your aluminum sourcing strategy, moving forward

Alcoa’s cuts and the situation with LME warehouses could impact midwest aluminum premiums, but they won’t likely have a long-term impact on aluminum prices due in part to a strong dollar and the significant amount of aluminum leaving China.

How will base metals fare for the remainder of 2015 and into 2016? You can find a more in-depth aluminum price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Last week, aluminum prices on the London Metal Exchange fell below $1,500 per metric ton for the first time in more than 6 years.

Aluminum 3M LME below $1500-mt

3-month LME aluminum is now below $1,500 per mt. Source: MetalMiner analysis of FastMarkets.com data.

The Aluminum Association commented this month to the US-China joint presidential statement as good progress on environment but also said more needed to be done regarding China’s overproduction.

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The new environmental law implementations promised by the presidential statement should provide incentives for carbon-intensive aluminum smelters in China to be weeded out.

It still looks like the market doesn’t have high expectations for aluminum. The oversupply in China continues to hit investor sentiment and analysts don’t expect China’s aluminum producers to close capacity anytime soon, despite the fact that many of them are underwater. China keeps adding production in its western provinces, where coal-based power is cheap.

Aluminum producers in the US are getting hurt the most, facing one of the darkness periods in aluminum history. The low price damage convinced Alcoa, Inc. split into 2 companies. The firm has found that its legacy smelting business, the company’s vertically integrated structure, is not the advantage it once was.

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Aluminum hitting another price low just adds to the already bearish sentiment across metals markets. We can’t expect metal prices to turn around yet while we see this sort of weakness in individual metals like aluminum.

 

The monthly Aluminum MMI® registered a value of 77 in September, a decrease of 3.8% from 80 in August.

Aluminum_Chart_September-2015_FNLThe 3-month London Metal Exchange aluminum price fell as low as $1,506/mt, the lowest level in more than 6 years as the continuous sell-off in Chinese shares is raising worries about a slump in aluminum demand from the world’s largest aluminum consumer.

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The latest trade data provided more negative news from China for the commodity sector, showing that China’s industrial slowdown is sharpening. Weaker demand from overseas buyers helped to further aggravate the trade slide in August.

Production Correction

Aluminum production in China fell 1.3% in July from a record in June, showing that the lowest prices in 6 years are forcing some smelters to cut output. Chinese smelters proposed to cut the less cost-efficient plants and delay the opening of new facilities. These cuts will take time to help aluminum prices as Chinese smelters already ramped up output this year with new lower-cost capacity.

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Like with other base metals, the low prices are hurting aluminum producers who are now facing one of the most painful periods in years. Century Aluminum Co. said in August that it would begin cutting production in October, blaming low aluminum prices caused by low-priced Chinese exports. The company’s stock price is down an astonishing 80% on the year to date.

What This Means For Metal Buyers

Like with other base metals, low prices will eventually cause producers to shut down capacity. However, with a bearish commodity environment, a strong dollar and weak global demand, it is hard to tell when prices will make a comeback. We could see more price declines before we see the bottom of this commodity market cycle.

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The monthly Aluminum MMI® registered a value of 80 in August, a decrease of 3.6% from 83 in July.

Aluminum_Chart_August-2015

The combined impact of stronger output and weaker demand from China are adding to the global aluminum surplus. Chinese exports remain strong (up 35% year-on-year in the first half of the year) and the recent Chinese stock market sell-off has only raised worries about a bigger-than-expected economic slowdown and the latest figures seem to agree with the market.

Purchasing Down Again

China’s July flash Purchasing Managers’ Index came in at 48.2. China’s PMI has been below 50 for five consecutive months. Figures below 50 are generally associated with a fall in manufacturing activity.

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Mix all this information together, add a strong dollar and a falling commodity market and there you have it: Aluminum prices hit a fresh six-year low.

With aluminum now nearing $1,600/mt, prices are close to or below the cost of production for a big portion of global capacity. This is hurting the profitability of aluminum producers and investors are well aware of that.

Producers Predicting Surpluses

Alcoa, Inc., recently raised its forecast for the global aluminum surplus, expecting a surplus of 760,000 metric tons this year which is almost double Alcoa’s previous forecast. The aluminum giant managed to offset declines in aluminum prices through its growth in its aerospace, automotive and alumina businesses. However, that hasn’t changed the minds of investors who have contributed to Alcoa’s shares dropping 40% year to date.

What This Means For Aluminum Purchasers

These price declines not only hurt producers, but also the profitability of buying organizations that believe prices can’t go lower and proceed to buy big volumes to meet future demand. It’s never too late to have a strategy – don’t be caught on the wrong side of the trend.

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