Aluminium consolidating recent gains; prices encountered resistance at $1,638

Aluminium is consolidating, having failed to find follow-through buying momentum above $1,640 yesterday, as implied by the long upper shadow.

Prices have encountered resistance from the 20 DMA at $1,638 but are so far holding support at $1,630 from the 40 DMA and the UTL formed by January/February/June lows. Resistance above is seen at $1,660/1,700. The stochastics remain supportive. Support below is seen at the 55 and 100 DMAs at $1,608 and 1,586 respectively. There remains room back to $1,520 to maintain the overall uptrend established so far this year.

Macro factors

LME stocks remain down a net 595,750 tonnes or 21 percent so far this year despite recent inbound deliveries. The c-3m spread stands at $9.5 contango. Longer-dated spreads have tightened somewhat into recent price strength, suggesting some forward selling from marginal producers. Meanwhile, the strong contango overall will continue to support cash-and-carry and warehouse deals.

China’s domestic market has tightened although the Shanghai premium remains steady owing to a negative arb window. SHFE stocks, which were last at 116,883 tonnes, have fallen over the past two months amid domestic tightness – they are also down 180,154 tonnes so far in 2016.

A group of major Chinese smelters said they would cut production if domestic prices drop below 11,500 yuan per tonne. But the market remains sceptical.

China’s unwrought aluminium and aluminium product exports were 340,000 tonnes in June. This took exports to 2.28 million tonnes in the first half of the year, which was down 9.4 percent on the same period of last year.

Physical premiums remain flat due to the summer lull. Outside of the US in particular, aluminium is battling several factors beyond the price – oversupply and new LME warehousing rules are currently creating a more competitive environment, enabling consumers to demand lower premiums.

Trade protectionism has increased – India has decided to impose a safeguard tax on imported unwrought aluminium.

Trade data also shows China is amply stocked to boost production – bauxite imports rose 12 percent year-on-year in the first half of the year while alumina imports were down a modest seven percent. Figures from the International Aluminium Institute also show output was running above year-ago levels in the first two months in the Gulf region as well as in parts of Asia (ex-China) and Europe.

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