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LME prices approach $1,800 as World manufacturing exits contraction; Backwardation intensifies (bearish premiums)

P1020 PREMIUMS ALERT.

LME prices approach $1,800 as World manufacturing exits contraction; Backwardation intensifies (bearish premiums)

Executive Summary

1. LME prices climb to a new three-week high as world manufacturing activity exits contraction territory; current price target is $1,810–$1,820 per mton.

LME 3M aluminum prices closed the session up 1.1% or $20 per mton at a new three- week high of $1,790 per mton amid: a) better-than-expected manufacturing activity data from China and Europe and, b) ongoing bullish short-term technical momentum as prices have accumulated a rally of 3.1% or $54 per mton since last Monday. World manufacturing activity was no longer in contraction territory in November, which is supportive of an ongoing bottoming-out process in LME prices. We continue to expect LME prices to trade within the $1,740–$1,940 per mton range.

More detail in full report.

2. LME December–January backwardation intensifies to a new record high, pressuring the Cash–3M “back” to a new sixteen-month peak (bearish spot premiums).

The Cash–3M backwardation intensified to a new sixteen-month high of $22.75 per mton (the sharpest since July 2018) from Friday’s $22.00 per mton. Today’s steepening in the December–January backwardation to a new record high of $17.75 per mton (from $16.50 per mton) more than offset a slight easing in the Cash–December backwardation to $11.50 from $12.00 per mton. This continues to be short-term bearish for spot P1020 premiums across the board.

More detail in full report.

3. SECTION 232 ALERT. US to remove Argentina’s exemption from Section 232 tariffs on aluminum; no relevant effect anticipated on MW premiums

President Trump stated that tariffs on all aluminum and steel products from Argentina and Brazil will be restored “effective immediately.” The statement was made this morning on the President’s Twitter feed, although it has not yet been accompanied by an official amendment to the presidential proclamation concerning Section 232 aluminum tariffs (which is legally required for the announcement to become official). If this announcement becomes official, US imports from Argentina will become subject to the 10% Section 232 tariff that is paid by all primary aluminum exporting countries other than Canada and Australia. Under the current oversupply conditions, we do not anticipate a relevant impact on premiums for P1020, billet, or foundry ingots.

More detail in full report.

4. P1020 PREMIUMS ALERT. Ocean freight rates up on IMO 2020 regulations (bullish premiums)

Various ocean freight companies have increased fuel related rates on all trade routes starting on December 1 to reflect the Internal Maritime Organization (IMO) 2020 regulations, which will limit sulfur content of bunker fuel to 0.5%, down from 3.5% and which will come into effect starting on January 1, 2020. Increasing freight rates are being felt in the aluminum supply chain as our market intel from the ground confirms as much as double-digit ocean freight rate increases y/y for some 2020 contracts. Higher ocean freight rates boost the full logistic costs of sourcing aluminum from offshore suppliers, which is bullish for P1020 premiums in North America, Europe, and Asia (MW, Rotterdam, and MJP).

More detail in full report.

5. ALUMINUM PRODUCTION ALERT. Slovalco smelter to curtail as much as 35 kmtpy of primary aluminum production; limited market impact as ROW’s production accelerates.

Norsk Hydro, the majority owner of the 175 kmtpy primary aluminum smelter in Slovakia, announced that a production curtailment of as much as 20% (35 kmtpy) will be recommended at Slovalco’s next general shareholder meeting. If approved, the curtailment could begin as soon as January 2020. The smelter is jointly owned by Norsk Hydro (55.3%) and Penta Investments (44.7%).Potential production losses of as much as 35 kmton in 2020 are not significant relative to the expected ROW market surplus.

More detail in full report.

6. China’s aluminum prices test levels above important resistance threshold on upbeat manufacturing data.

SHFE December 2019 aluminum prices closed the overnight session up 0.6% at 13,985 yuan per mton ($1,758 per mton, excluding VAT) and tested levels as high as 14,055 yuan per mton ($1,767 per mton, excluding VAT) in after-hours trading. Prices were buoyed by long buying activity triggered mainly by stronger-than-expected domestic manufacturing activity data. China’s manufacturing activity rebounded into expansion territory for the first time in seven months, as indicated by November’s official manufacturing index rising to 50.2 from 49.3 in October.

More detail in full report.