As LME Aluminium prices break above $2,000 per tonne, trading at multiyear highs, the market is focusing its attention on perceived tightness of metal supply, as well as robust manufacturing data released from China in recent weeks.
Analysis of our proprietary datasets indicates these current price levels are unsustainable.
On a short-term time horizon our machine learning models are neutral/flat on Aluminium prices. Further out, our models become more bearish, particularly on the three and six month time horizons. The bearishness of our outlook is driven by data within the fundamental family inputs of Macro, Satellite and Inventories. On the technical side, our CTA input data is also bearish over the longer term.
Macroeconomic
The global economic data that we source is pointing to a moderation in global economic activity, as previously positive economic signals are now softening, particularly across Europe and much of North America as a consequence of the second lockdown.
Granted, the Chinese economic data has held up well in 2020, with both manufacturing and non-manufacturing indicators seemingly very stable. However, growth has been static since the beginning of 2020.
A significant portion of the US macroeconomic data, including services, manufacturing and confidence indicators, have been steadily declining following a peak in June and July, while jobless claims are running at recession levels.
In Europe, the situation is even worse. The latest European PMI figures are close to a very bearish 45. Q3 GDP figures are also turning negative again as the second lockdown impacts all major European economies.
Satellite activity
Our analysis of activity in key mines, smelters and recycling plants across the globe has recently shown a pick up in production and smelter activity, as stronger Aluminium prices have boosted operations, mainly across Asia, as one would expect.
It typically takes three months for our satellite indicators to be borne out in price movements of tradable products; we don’t see much impact on our shorter term price predictions. We have seen particularly impressive predictive performance recently in our three month and six month predictions.
Metals Inventories
The Aluminium market could be heading for its largest supply surplus since the global financial crisis of 2009. We could see a global surplus of 3 million tonnes this year, with 90% of that surplus being stored outside of China, in locations like Malaysia, South Korea, and Taiwan.
Whilst ChAI’s inventory data is currently modestly bullish, this sentiment is expected to decline steadily in the coming months to more neutral levels.
This hidden build in inventory can be seen in the “off-warrant” stocks report, a monthly count of what the exchange terms “shadow” stocks. Roughly defined, this is any metal that is physically being stored in or near exchange-registered warehouses under contracts that explicitly references the option of delivery onto the LME warehousing system. This metal is ready and primed to be warranted if necessary, at which stage it shows up in the LME’s daily stocks report.
At the end of September, off-warrant stocks numbered 1.56 million tonnes, larger than the official exchange-registered stocks of 1.46 million tonnes. Asia is the favourite location for this new aluminium storage as it remains relatively cheap, as well as close to China in the event of import arbitrage opportunities, as were seen over the summer months.
Unlike the previous financial crisis, which was to a large extent driven by banking counterparty risk, current credit lines are still strong enough for the aluminium supply chain to hold higher inventory, be it in LME shadow storage, or held in private storage. As long as the credit markets remain robust, this surplus aluminium will remain hidden.
Another part of the market balance is that Chinese aluminium consumption is expected to contract by a marginal -0.25% this year, while the rest of the world will experience a -14.5% slump. Although this drop in global consumption has not been reflected in the current price rally, we believe it will play out in the first half of 2021.
CTA
These input signals are designed to detect congestion in CTA positioning and act as a contrarian indicator within our Technical families.
We see CTAs as already being heavily long Aluminium contracts, as reflected in our Commitment of Traders input. But, based on the current data we track, the likelihood of them still holding the same long positions in the market in 6 months is remote. Hence our short and medium term CTA signals are bullish, but we anticipate that the same level of long fund positioning will not exist in 6 months time.
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Originally published at https://chaipredict.com on December 3, 2020.
