- 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.
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.