ALUMINIUM TODAY: Price rebounds while sentiment remains positively biased

Short Term:
Medium Term:
Long Term:
Resistances:
R1 1,916 2017 high (Feb)
R2 2,076 38.2% Fibo of 2008-2009 downtrend
Support:
20 1,862
50 1800
100 1,754
150 1,712
Support:
S1 1,862 20 DMA
S2 1,680 Key level
S3 1,644 DTL from 2008 high
S4 1,575 UTL (blue line)
S5 1,433 2015 low (Nov)
Stochastics:
Legend:

Technical Comment

Momentum is positive while the ADX is above 20, suggesting a strong uptrend in motion.

Analysis

  • Although aluminium has corrected lower toward its 20 DMA, this level seems to be acting as strong support, hence today’s rebound. So we retain our constructive view over the very short term (around one month).

  • From a long-term perspective, aluminium seems to be enjoying a bullish breakout pattern (see our monthly chart), pointing to higher highs in the coming months.

  • On the upside, aluminium’s next challenge is to take out the 38.2% Fibo of the 2008-2009 downtrend. On the downside, a break below the 20 DMA may point to a weakening sentiment, resulting in downward pressure first toward the 150 DMA and then the UTL.

Macro drivers

LME aluminium is rebounding on Friday February 24 after yesterday’s sharp sell-off alongside the other base metals on renewed fears over the Chinese property bubble.

Prices are still slightly up on the week, reflecting investor expectations of supply cuts in China. The Chinese environment ministry is considering a proposal to remove around 30% of aluminium smelting capacity in the provinces of Henan, Shandong, Shanxi and Hebei over November 2016-March 2017 to combat pollution.

But the fluctuations in visible stocks (see below) suggest last year’s global rebalancing of the market has ended, with LME stocks stabilising and SHFE stocks surging. The strong run-up in prices may be triggering a supply response.

According to the IAI, global aluminium production surged month-on-month for a fourth month in a row in January. The supply response has been driven mainly by China. Still, Chinese production was effectively unchanged over 2016 year-on-year. This year, we think the pace of growth in Chinese supply growth will be smaller than domestic demand growth of an expected 7%.So we expect the rebalancing to continue and prices to work higher.

The latest LME COTR shows a significant bout of short covering over February 10-17. The net long fund position rose 14% week-on-week to 169,448 lots. Despite this, aluminium prices were broadly stable over the reporting period. Fresh buying is needed in the weeks ahead to suggest that speculative sentiment is turning bullish.

Flows in visible inventories (LME & SHFE):

LME and SHFE stocks have risen since December. This suggests a loosening in the supply/demand balance of the refined market, which makes the year-to-date rally in international prices hard to justify from that angle.

  • LME stocks – at 2.182 million tonnes as of February 23 – are down 87,200 tonnes or 4% so far in February (including a fall of 13,425 tonnes week), after rising 67,725 tonnes or 3% in January. In the year to date, stocks have edged down 20,500 tonnes or 1% after falling 687,000 tonnes or 24% in the whole of 2016.
  • SHFE stocks – at 193,552 tonnes as of February 24 – are up 68,124 tonnes or 54% so far in February (including an increase of 4,334 tonnes week) after increasing 24,706 tonnes or 25% in January. In the year to date, stocks are up a significant 92,830 tonnes or 92% after they tumbled by 196,315 tonnes or 66% in the whole of 2016. 

Supply/demand balance:

According to the WBMS, the global primary aluminium market was in a deficit of 985,000 tonnes in 2016 after recording a deficit of 659,000 tonnes in the whole of 2015.

Conclusion

We maintain our constructive view on aluminium over the very short term as long as prices remain supported by their 20 DMA (i.e. stop-loss at $1,840 per tonne), a sign of friendly momentum. We remain prudent because of long liquidation across the base metals, which could continue and would have negative implications on aluminium. 

We are slightly constructive over the short (1-3 months) and medium (3-6 months) terms because we think that the global reflationary environment should prevail and induce investors to remain overweight base metals.

Over the long term (6-12 months), however, we retain our bearish stance because the rebalancing process may not survive the substantial Chinese supply response that is already in progress in a market that is already oversupplied.

For more information, see our February Spotlight, which we published yesterday.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.