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LME prices down and threatening to break below $1,700 per mton; Japanese aluminum demand to contract in 2019

Executive Summary

1. LME PRICE UPDATE. Prices to fall further if $1,745-per-mton-support fails; new leg down below $1,700 per mton could be unleashed before the end of this week.

LME 3M aluminum prices closed the session at $1,746 per mton, down 0.8% or $14 per mton from yesterday. Aluminum underperformed against oil prices and most of the base metals complex amid: a) bearish market sentiment toward aluminum (as we advised yesterday amid fresh multi-year lows in US primary producer equity prices), b) a 20 kmton inflow into South Korean LME warehouses; and c) deteriorating short-term technical indicators. If support fails at $1,745 per mton, a new leg down would target $1,680–$1,550 per mton.

More details in full report.

2. JAPAN ALUMINUM UPDATE. Japanese aluminum mill products output grew in July but still accumulated a steep year-to-date decline.

In July, production of aluminum mill products by Japanese producers grew by 0.6% y/y, returning to annual expansion territory for the first time since December 2017. Nevertheless, year to date, domestic production still contracted by 3.9% y/y, as: a) production of extruded products fell by 2.9% y/y; b) production of flat-rolled products contracted by 4.4% y/y; and c) imports of aluminum mill products are booming and growing at double-digit annual rates. HARBOR estimates that Japanese primary aluminum consumption fell by 4.2% y/y in H1 2019.

More details in full report.

3. SMELTING PROFITABILITY ANALYSIS. World smelting profitability improves further on declining costs; most Chinese smelters make money.

In ROW (Western World), around 96% of primary aluminum operating capacity is now profitable on a cash basis (August), up from 94% at the start of the year. In China, around 86% of primary aluminum operating capacity is now profitable on a cash basis (August), up sharply from 32% at the start of the year. The biggest driver behind improved world smelting profitability has to do with a sharp decline in production costs. In this context, ROW's primary aluminum production is set to expand by the most ever in the history of the aluminum industry.

More details in full report.

4. LME Cash–3M contango loosens to a one-week high as the curve steepens from September to December.

The Cash–3M contango widened to a one-week high of $31.00 per mton from $28.25 per mton yesterday, remaining supportive for spot premiums around the world. Both the September–October and October–November contangos widened to respective record-wide marks of $10.00 per mton and $9.75 per mton (from yesterday’s $9.25 and $8.75 per mton).

More details in full report.

5. China’s aluminum prices firm up amid fresh buying activity.

Prices closed higher for the first time in a week, up 0.3% at 14,290 yuan per mton ($1,765 per mton, excluding VAT) and extended gains in after-hours trading until testing levels near 14,350 yuan per mton ($1,772 per mton, excluding VAT). SHFE aluminum open interest (number of open futures contracts) increased today to an eighteen-month high (up by 2.5%), suggesting that funds continued to step in. Nonetheless, if prices fail to extend gains above a ten-month high reached last week, speculators could be prompted to take profits out of recently established long positions.

More details in full report.