Location is everything when it comes to the outlook for aluminium. China and ex-China fundamentals are on diverging paths, but it is the latter's deficit that matters most for the LME market which is thirsty for primary metal.
We expect Chinese exports to pressure prices in the short-term, but overall we are bullish and think consumers might look to hedge on the dips
A stubborn Chinese surplus depresses local prices while an ex-China deficit has driven LME prices to highs not seen since 2011. Regional premiums are also on the rise as trade barriers loom. In the short term, we expect pressure from high Chinese semi exports, but further out we see the potential for the two worlds to diverge: A more isolated surplus in China compared to a tight LME market with a thirst for ingot. But for once, it’s not just all about China.
Chinese Semi’s: The SHFE-LME arb is the most supportive for Chinese exports since 2011, and the high January number (+14% YoY) will be the norm for some time. We expect aluminium prices could come down to $2,000 near-term as long fund money retreats from signs that the Chinese surplus is spilling out into the LME domain. But weakness will be temporary, and consumers should look to hedge on these dips.
Ex-China Deficit: Central to our view is the observation that the ex-China market is in a growing deficit and while we do expect this to be even larger than the Chinese surplus it is the ex-china balance that matters most for the LME price.
LME Tightness: The LME is thirsty for ingot. Backwardations are increasingly common at the front of the curve. This will drive prices higher after the funds retreat. LME stocks are dwarfed by those off-warrant, which creates a structural imbalance between borrowers and lenders. Higher premiums and low warehouse incentives compound the situation
China isolation: The fake semi-trade has collapsed significantly, and trade barriers threaten to displace markets for genuine semi exports. The Chinese surplus will be less able to alleviate the ex-China tightness.
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