ALUMINIUM TODAY: Prices leap higher to levels last seen in May 2015

Short Term:
Medium Term:
Long Term:
Resistances:
R1 1916 Feb 15 high
R2 1977 May 2015 high
R3 2119 Aug 2014 peak
Support:
S1 1916 Former resistance
S2 1878 20 DMA
S3 1858 Feb 23 dip
S4 1773 UTL
Stochastics:Bullish
Legend:

DMA – daily moving average

D/UTL – downtrend/uptrend line

Fibo – Fibonacci retracement level

H&S – head-and-shoulder pattern

HSL – horizontal support line

MACD – moving average convergence divergence

Technical Comment

Analysis

  • Three-month aluminium prices have leapt higher to levels not seen since May 2015 – the upward trend is established and, as the long-term chart shows (and as we have been highlighting for a long time), the rally may have only just started. This developing trend could be a key driver for CTA-type funds. 
  • The rally that started in November 2015 and oscillated higher in 2016 has accelerated higher this year. The next upside targets are $1,977 and $2,120 per tonne.
  • The stochastics are bullish and the slow line is not in high ground yet so we expect the rally to continue. 

Macro factors

Despite a 33,250-tonne delivery of stocks into LME-registered warehouses on Friday February 24, the overall trend in LME stocks is downward. More to the point, the net flow is accelerating. Stocks declined by an average of 4,075 tpd in February after an average drop of 3,225 tpd and 2,866 tpd in December.

The huge run-up in cancelled warrants that started on February 13 has seen 387,250 tonnes of warrants cancelled. This suggests metal may start to leave warehouses at a faster pace. With physical premiums on the rise, it looks as though metal is set to leave warehouses and head to consumers in the USA – most of the flow is expected to be from Asia. The fact metal is leaving LME sheds suggests that the off-market stocks may not be as high as expected or are  still locked-up in financing deals.

The potential mobilisation of so much warranted material, by recent cancellations, is likely to suppress physical premiums once the metal arrives in the physical market.  

In line with the warrant cancellations and higher premiums, the nearby spreads on the LME have tighened. Cash/three months was recently quoted at $4.75-3.75 per tonne contango. It was even tighter on Friday and Monday but remains tight compared with an average of $10c in February.

We had expected aluminium supply to be price-elastic but that was not the case in November and December despite the run-up in prices. But the latest International Aluminium Institute data showed a pick-up in Chinese output to 95,161 tpd from 93,258 tpd in December. That equates to an increase of some 700,000 tonnes on an annualised basis. 

Today is option declaration for March options on the LME. The latest options open interest (OI) data showed there were 5,651 $1,900 calls, 340 $1,925 calls, 2,950 $1,950 calls and 3,271 $2,000 calls. So the recent spike in prices has no doubt been fuelled by some delta-hedge buying against options that were coming into the money. There may therefore be some setback later today.

Conclusion

The price performance suggests bullish sentiment; the two-steps up/one step down pattern looks set to endure, especially while LME stocks continue to fall. The rise in cancelled warrants suggests this trend will continue.

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

About Kathleen Retourne

Kathleen has been reporting on commodity markets since 2006. She joined FastMarkets in 2011 and has immersed herself into the metal industry, specialising in LME coverage. Follow her on twitter @kathretourne