ALUMINIUM TODAY: Prices testing higher again

Short Term:
Medium Term:
Long Term:
Resistances:
R1 1605 Mar high
R2 1629 Long-term DTL from 2008 high
R3 1646-1655.50 Resistance
R4 1730 May 2015 low/Jul 2015 high
R5 1760 Support Jan-Apr 2015
R6 1775 50% Fibo Sep 2014>Nov 2015 fall
R7 1794.50 2016 high
R8 1828 June 2010 spike down/low Jun-Aug 2012
R9 1870 20 DMA
R10 1856 61.8% Fibo Sep 2014>Nov 2015 fall
R11 1883 Jan 2017 high
R12 1977 May 2015 spike
Support:
S1 1870 20 DMA
S2 1818 UTL Jan/Feb lows
S3 1830 40 DMA
S4 1787 UTL Mar/Jun/Jul 2016 lows
S5 1758 100 DMA
S6 1689 200 DMA
S7 1629 Long-term DTL from 2008 high
S8 1586 2016 UTL
S9 1432.50 2016 low
S10 1270 2009 low
Stochastics:Crossed higher in mid ground
Legend:

DMA – daily moving average

D/UTL – down/uptrend line

Fibo – Fibonacci retracement level

H&S – head-and-shoulder pattern

HSL – horizontal support line

MACD – moving average convergence divergence

Analysis

  • Aluminium prices have turned higher again, having consolidated last week.
  • Overall sentiment remains bullish – prices have been above the 20 DMA since early January.
  • The stochastics have crossed higher, indicating stronger short-term momentum.
  • Resistance is expected at the February 15 high of $1,916 per tonne while scaled-up resistance is expected towards $1,977, the level to which prices spiked in May 2015.
  • Further UTL support is seen at $1,812 and $1,782 per tonne, which also coincide with the 40 and 55 DMAs.
  • Resistance above the February 15 high is seen towards the May 2015 high at $1,977.

Macro factors

Price sentiment has been stronger so far this week although markets are likely to take a cautious approach ahead of President Trump’s joint session speech this evening and with the Chinese government holding its National Peoples’s Congress this weekend.

LME stock withdrawals are running at a strong pace of 5,939 tpd on average so far in 2017 but stocks have declined by only a net 1,275 tonnes in that time amid pockets of sizeable inward deliveries. The cash/three-month spread was last at $2 per tonne contango compared with an average of $4.5 backwardation during January. Stock are tightly held, with one entity accounting for 30-39% of warrant holdings. Fresh cancellations also signal consistent demand. The proportion of metal on cancelled warrants has increased to 40% from around 27% at the end of January.

In China, SHFE stocks are relatively low at 193,552 tonnes, having fallen 196,780 tonnes in 2016. Recent reports suggest that China will remove 30% of aluminium smelting capacity in three provinces – Henan, Shandong and Shanxi. But we are wary of the net impact because this is likely to be outdated capacity that will be more than offset by new low-cost capacity additions. Recent data has shown a gradual ramp-up in Chinese smelter output, which climbed to a fresh high of 95,161 tpd from 74,871 tpd in December, according to the International Aluminium Institute (IAI).  

China’s exports of unwrought aluminium and aluminium products totalled 390,000 tonnes in January, up 2.6% year-on-year. They increased by 1% in 2016 to 4.1 million tonnes in 2016. Smelters continued to export large volumes of metal in semi-manufactured forms to take advantage of zero duties on these products.

Physical premiums tracked by our physicals team are firming. Main Japanese ports (MJP) spot aluminium premiums rose 9% week-on-week in a quiet market, with the second-quarter MJP premium expected to settle at three-digit levels.

Conclusion

Aluminium prices are looking stronger again. We maintain an upwards price bias because strong demand and falling stocks continue to signal tightening fundamentals. There could be short-term volatility, however, if President Trump fails to deliver on his proposed tax reforms and infrastructure investment or if China shifts to tighten monetary policy. We also feel markets underestimate the chances the Fed will raise interest rates at next month’s FOMC meeting.

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