Inventories are the most important signal for ChAI’s aluminium price predictions, accounting for more than double the weighting of other inputs. The ChAI model is less positive for prices at 1 Month and 3 Months, predicting they are more likely to fall than rise.
What do the fundamentals predict?
The V-shaped recovery in industrial metals is macro-driven. Metals markets are forward-looking while economic data/statistics reflect the past. Factors such as a weak USD, quantitative easing (QE) from global central banks and stimulus-related infrastructure spending were likely to boost prices further.
That said, aluminium prices are lagging other base metals as total industry stocks are edging higher amid wide contangos but much of these are tied-up in financing deals and unavailable to be consumed buoying prices.
According to the World Bureau of Metal Statistics ((WBMS), total reported stocks rose during the first seven months of the year to close at the end of the period 244kt above the December 2019 level. The market surplus during the same period was 1.15Mt, suggesting that unreported or invisible stocks rose by 904t.
Global production growth is slowing at a time of stronger demand growth, bolstered by a “green agenda” being adopted by governments around the world. The Covid-19 pandemic boosted aluminium demand from the packaging sector, while the automotive and construction sectors are now recovering after taking the biggest hits during the pandemic’s peak,
In a base case scenario, prices are likely to trend slightly higher/sideways despite weak fundamentals (subdued demand ex-China, oversupply, and rising inventories) to end in a $1,750–1,800/t range by year-end.
Risk to prices is more skewed to the upside in a reflationary macro environment and investors buy hard assets such as industrial metals.
Chart patterns are bullish. A golden cross, where a short-term moving average (100-dma) crosses above its long-term moving average (200-dma), is likely to be supportive of further price strength.
Future increases in aluminium prices will be driven more by macroeconomic factors rather than supply-and-demand fundamentals into 2021. After a sharp rebound in prices there are signs that a period of consolidation is now taking place supported by a golden cross on the charts. Prices will remain volatile due to several event risks (US elections, China policy, Covid-19, inventory changes, more stimulus, etc.).
About the Contributor: Robin Bhar has worked as a metals analyst for over 30 years in several corporate and investment banks in London, most recently at Societe Generale where he was Head of Metals Research from 2012–2019. Prior to that, Robin was a Metals Strategist for Crédit Agricole, providing research and strategy for the bank’s clients and internal trading and sales teams. Prior to CA, Robin worked at UBS and Standard Bank London working with the metals & mining advisory, trading and sales teams. He also has experience at Brandeis Brokers and at Rudolf Wolff & Co. where he began his career. Robin holds an Honours degree in geology and a Master’s in mineral exploration.
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Originally published at https://chai-uk.com on October 5, 2020.
