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LME prices bounce back to $1,800 but macro and technical outlook remain fragile; LME spreads tighten further (bearish premiums)

LME prices bounce back to $1,800 but macro and technical outlook remain fragile; LME spreads tighten further (bearish premiums)

Executive Summary

1. LME prices find support but remain exposed to a new leg down amid fragile macroeconomic and technical backdrop.

LME 3M aluminum prices closed the session up 0.8% or $14.50 per mton at $1,800 per mton. Prices increased for the first time since last Friday, testing interim resistance at $1,800 per mton as: a) US economic data continued to beat market expectations, and b) another round of China-US trade talks kicked off today. A close above $1,810 per mton tomorrow could reopen door to the $1,830–$1,850 per mton zone. However, a decline would negate last week’s close above the $1,800 per mton mark and raise short-term downside risks.

More details in full report.

2. LME Cash–3M contango tightens to an eight-week low amid December backwardation, unsupportive for premiums as it becomes uneconomic for some holders of physical units.

The Cash–3M contango sharply narrowed to $23.25 from $31.25 per mton yesterday, amid a $6.00 per mton backwardation between December 20 (the third-Wednesday contract) and December 21 (today’s 3M contract). Specifically, there was a $14.50 per mton backwardation between December 10, 2019, and January 2, 2020. As a result, we estimate that the Cash–3M contango is only wide enough for the most competitive players (i.e., those with access to the lowest financing and storage costs) to profitably finance short-term cash-and-carry deals.

More details in full report.

3. EUROPEAN BILLET UPDATE. Spot billet premiums for secondary units fall further in Italy as oversupply conditions continue to bite.

Secondary spot billet premiums fall in Italy to $310–$320 per mton, while lead times shorten due to ongoing deterioration in extrusion demand. Meanwhile, our market intel from the ground confirms that some extruders' lead times are down from 3–4 weeks to as low as 3–15 days. Moreover, we understand that Italian billet consumers seem to be exercising caution before committing to recent spot purchases as they appear to be expecting even lower premiums ahead. As of today, Italian spot billet premiums are effectively setting the low end of the European spot billet premium range.

More details in full report.

4. China’s aluminum prices close at a one-month low but find some support.

SHFE November 2019 aluminum prices closed the overnight session down 0.6% at a one month low of 14,160 yuan per mton ($1,766 per mton, excluding VAT), holding near intraday lows seen early in the session amid downbeat short-term momentum and a fresh downgrade in world and Chinese GDP growth forecasts by the OECD. Nevertheless, prices found intraday support after nearly testing their 50-day moving average threshold that stands at 14,105 yuan per mton ($1,759 per mton, excluding VAT).

More details in full report.