Fresh 2016 price high still on the cards for aluminium

Momentum is holding above 0, suggesting the uptrend remains in place. ADX is above 20, suggesting the trend is strong.

Analysis

• Aluminium continues higher after finding strong support at its key daily moving averages in June. While it has solid positive momentum, we believe a fresh 2016 high is possible in July.
• On the upside, aluminium’s next challenge is to take out its the 2016 high to maintain the upward trend. On the downside, a clear break below the 20 DMA could reflect a negative in swing in sentiment, which in turn would lead to further downside toward the 100 DMA, its UTL and its 2015 low.

Macro drivers

Aluminium is more volatile but is unchanged since Monday after rising for a fourth straight week last week. The recent consolidation across base metals may stem from resurgent risk aversion driven by the storm in the Italian banking system.

Investor sentiment toward aluminium remains favourable after a group of major Chinese smelters announced possible production cuts should domestic prices fall below 11,500 yuan per tonne – they are currently at 12,480 yuan.

But the physical market remains week. The US Midwest aluminium premium fell to a fresh five-year low due to strong imports. In Asia, the focus remains on negotiations for the supply of ingots to major Japanese ports (MJP) in the third quarter. The latest deals have been heard at $90-93 per tonne, up from $90 last week but still down from $115-117 for the second quarter and $110 for the first quarter.

The Chinese market is showing signs of tightness. SHFE aluminium has been backwardated since late-April, partly because of steadily falling SHFE stocks. They were last at 163,664 tonnes, down 11.5 percent week-on-week and down 45 percent in the year to date.

LME stocks at 2.36 million tonnes as of July 5 were down 5.5 percent in June and 18 percent in the year to date. The c/3s closed yesterday at $10.75 contango compared with $6 contango at the end of June and a backwardation of $3 on June 10. Despite the fall in LME stocks, c/3s has eased after the June prompt date. But renewed tightness could emerge in the days ahead of the July prompt date (July 20) should shorts need to cover or roll over their positions.

There has been no dominant holder of total warrants since June 22, suggesting that the dominant holder with strong hands who probably tightened nearby spreads in the first half of June is now gone. Should a dominant holder reappear, nearby spreads could tighten, we feel.

Outlook:

According to the industry watchers the uptrend in place since November is likely to remain intact in the medium term and prices could reach a fresh 2016 high in the next month or so, principally supported by signs of tightness in China and the rest of the world.