Bottoming-Out Process in Place, Weak Rally Expected Ahead
November 12, 2019
Executive Summary
- After reaching HARBOR's downward target zone of $1,680-$1,550 per mton, LME prices have rallied over $100 per mton.
Since falling to a new 32-month low in early-October and practically reaching our target price zone, LME prices rallied by nearly 7% in early-November as: a) US manufacturing activity posted a higher reading, b) the Fed decided not to lower interest rates anymore, c) the US dollar fell from two-year highs, d) bearishness toward the aluminum market had reached extreme levels, and e) an interim trade deal between the US and China became more likely.
- HARBOR sees LME prices in a bottoming-out process.
Prices have been testing technical resistance around $1,820 per mton, the 200-day moving average threshold. This behavior is roughly consistent with our prior expectations (as outlined since July) of a price bottom by the end of Q3 and a limited rally toward $1,900 per mton in Q4 2019.
- In the next weeks, we expect range-trading within the $1,740-$1,900 per mton zone.
Indeed, our latest assessment of manufacturing/economic cycles, extreme bearishness in market sentiment toward aluminum, scrap spreads, alumina prices, among other drivers, are consistent with prices range-trading within $1,740-$1,900 per mton into H1 2020.
- However, unsupportive industry fundamentals signal lower LME prices again in H2 2020.
In spite of the above, we do not see conditions in place yet for a lasting LME price rally. Industry fundamentals are expected to deteriorate over the next few quarters as: a) world production of primary aluminum expands considerably (pushing the Western World market toward its biggest surplus in a decade); b) declining smelting costs and a flattening industry cost curve discourage production curtailments; while c) global demand for primary aluminum remains fragile and growing at subdued rates. As a result, HARBOR continues to expect LME prices to average $1,720 per mton in 2020 (base scenario).