Subscription inquiry

Bottoming-Out Process in Place, Weak Rally Expected Ahead

Executive Summary

  1. 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.
  2. 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.
  3. 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.
  4. 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).