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LME Prices Have Not Bottomed-Out Yet, Timid Recovery Expected In Last Months of 2019

Executive Summary

1 LME aluminum prices have fallen to fresh two-year lows below the key$1,770 per mton threshold.

LME 3M aluminum fell by 6% between mid-May and early-June, hitting a new 29-month low of $1,752 per mton, as a result of: a) world manufacturing activity contracting for the first time in seven years; b) expectations of lower primary aluminum smelting costs ahead, given the full restart of the world’s biggest alumina refinery (Alunorte); c) a stronger US dollar; and d) further downgrades to the macroeconomic outlook due to trade tensions.

2 Technical patterns suggest prices have not bottomed-out yet, $1,550 per mton potential price target.

Price behavior continues to be consistent with a medium-term bearish formation that could target levels as low as $1,550 per mton in Q3, but only if prevailing support at the key $1,770 per mton threshold is officially breached.

3 Expecting a modest price recovery by year-end, upside capped.

Our demand leading indicators suggest that end-user demand weakness could temporarily subside in 3-4 months from now at the latest, which could allow for LME prices to temporarily bounce back toward $1,900 per mton. However, we don’t see prices experiencing a significant recovery thereafter, given: a) the imminent start of an interest rate easing cycle; b) a considerable downside ahead for alumina prices and smelting costs; and c) a growing market surplus of primary aluminum in the Western World.

4 For 2020, HARBOR continues to expect prices to average between $1,870-$1,660 per mton.

Indeed, our forecasts for LME cash aluminum prices in 2020 have not changed, standing at $1,870 per mton (base scenario, 50% odds), and $1,660 per mton (downside scenario, 40% odds). Meanwhile, the latest Consensus forecast for 2020 stands at $2,037 per mton (revised down by 3% since March).