The factors are repositioned when there's movement in prices and/or supply/demand balances.
Recent News: China's aluminum production is nearing last year's peak levels, with a significant ramp-up in previously idled capacities in Yunnan province. The increase in production, which rose 5% year-on-year to 3.65 million metric tons in May, is pushing domestic alumina prices close to their highest since late 2021. This surge is largely due to improved rainfall in Yunnan, alleviating previous power shortages and allowing local authorities to lift restrictions on aluminium producers, thereby reinstating approximately 1.15 million tons of capacity. (Reuters, July 1, 2024)
However, this increase in aluminum production is straining the alumina supply, as the growth in demand from smelter restarts outpaces the production of alumina, which only saw a 3.4% increase. The mismatch is evident in the price performance on the Shanghai Futures Exchange, where alumina prices have risen by 15.3% since January, compared to a 3.5% increase in aluminum prices. This scenario has led to higher and more volatile alumina pricing, exacerbated by environmental inspections and the increased reliance on bauxite imports from Guinea, highlighting a new vulnerability in China's position as the world's leading aluminum producer.
Global Supply Demand (Mostly Bearish, Surprise):
Chinese aluminum demand has remained weak despite some signs of improvement in economic data. Meanwhile, production in China has surged due to improved electricity supply in regions previously impacted by drought. China's Global aluminum production continues to rise, with China being the leading producer.
USD (Neutral, Priced In):
The Federal Reserve continues to guide towards at least one interest rate cut at some point in late 2024, depending on the inflation rate. The most recent data shows inflation has eased but still remains above the 2% target, supporting the idea that rates may come down sooner. Lower interest rates could weaken the US dollar, potentially supporting commodity prices in USD.
Energy Costs (Bearish, Partially Priced In):
Natural gas prices remain depressed. The July contract is now down nearly 30c since reaching a peak above $3/MMbtu last week. Cooling weather forecasts pressured prices lower as expectations of strong demand moderated slightly.
Economic Slowdown (Bearish, Surprise):
Central banks worldwide continue to battle inflation while trying to prevent a slowdown in economic activity. However, China is trying to fight deflation amid a property and housing market crisis. US manufacturing data, based on the ISM Manufacturing PMI, has shown signs of improving after being depressed for nearly two years.
US Elections/Govt Policy (Bearish, Partially Priced In):
The US elections could have a bearish impact on the global metals markets, particularly for oversupplied metals like copper and aluminum. The potential return of Donald Trump to the presidency introduces significant policy uncertainties, especially regarding trade tariffs. Trump has proposed a 60% tariff on Chinese imports, which would disrupt supply chains, decrease demand for metals, and exacerbate the current oversupply situation. This increased uncertainty could lead to lower industrial activity and investment, further pressuring metal prices
Keep an eye on inflows/outflows of Russian and Indian-produced aluminum in LME warehouses due to sanctions/bans and LME’s proposed carbon tracking program. The Biden administration has imposed new tariffs on steel and aluminum shipments passing through Mexico to prevent China from evading existing levies. Effective immediately, the measures impose a 25% tariff on steel not originating from Mexico, the US, or Canada, and a 10% tariff on aluminum from China, Russia, Iran, or Belarus routed through Mexico. Coordinated with Mexican President Lopez Obrador, this move aims to curb metal influxes into the US market and address oversupply concerns from China, safeguarding domestic industries.
Raw Materials (Neutral, Partially Priced In):
Raw material supply is adequate outside of copper. Copper mine supply has been tight for a while but reports suggest refined copper supply is able to meet current demands.
Speculative Positioning (Bullish, Surprise):
Investment funds, which are purely speculators in the aluminum and copper futures markets, can have a significant impact on financial prices. According to CFTC Commitment of Traders data, speculators remain net long Copper but have pivoted to a short position in the Aluminum market.
Geopolitical Risk (Bullish, Surprise):
Considering the turmoil hitting several countries in the eastern hemisphere, we decided to add this factor. However, headline risks have the potential to move prices in the near-term.