LME Downward Trend Not Over Yet

Executive Summary

1. LME downward trend continues.

   Downward trend continues amid: a) further deterioration in world manufacturing activity growth (hit a 32-month low in February); b) declining primary aluminium smelting costs (ROW’s cash cost fell to a 14-month low of $1,628); and c) bearish sentiment toward aluminum given recent inventory buildups in China and Malaysia.
    

2. Prices headed towards $1,770 per mton (downward target).

   Prices have not bottomed-out yet and remain inside a medium-term downward trend likely to revisit January’s two-year low near our previously identified target of $1,770 per mton. This key threshold needs to hold to prevent the opening of a new technical target, which could be as low as $1,510 per mton (in a less likely, downside scenario).
    

3. The world aluminium industry inside a cyclical bearish stage.

   The medium-term downed price trend is underpinned by weakening aluminium demand, expectations of aluminium booming production, inventory buildups at visible and off-warrant warehouses, falling smelting production costs (on alumina, carbon products, and energy), ample scrap supply at deep discounts, a strong US dollar, and booming Chinese exports. We don’t see a reversion of this backdrop anytime soon.
    

4. Our forecasts have not changed, expecting average LME prices to fall in 2019-2020.

   In our base scenario (60% odds), we continue to expect LME Cash prices to fall by 9% y/y in 2019 an average of $1,925 per mton, and then average lower in 2020 at $1,870 per mton. In our downside scenario (30% odds), prices could average $1,770 and $1,660 per mton in 2019 and 2020, respectively. In turn, the Consensus forecasts for 2019 and 2020 were further downgraded to respective one-year lows of $2,053 and $2,094 per mton.