AEGIS Factor Matrices: Most important variables affecting metals prices

The factors are repositioned when there's movement in prices and/or supply/demand balances.

Recent News: Aluminum prices trade higher, driven by recovering demand in China and supply concerns related to rising raw material costs (Alumina). Chinese aluminum inventories have fallen to their lowest levels since May, indicating increased consumption, particularly from the solar sector. However, surging alumina costs are putting pressure on smelters, raising the potential for production cuts if this trend persists. Analysts note that while supply risks are growing, Chinese smelters' strong cash reserves may help mitigate output reductions for now. Other industrial metals, including copper and zinc, also saw gains, alongside a rebound in iron ore prices. (Bloomberg)

Meanwhile, market participants are closely watching potential responses from the LME to complaints about sharp fee hikes at a major warehouse operator, which some traders believe are distorting the global aluminum market.

Global Supply Demand (Bearish, Priced-In):

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 US job market, impacted by higher borrowing costs, saw a dip in job applications and a higher unemployment rate, with August's nonfarm payrolls missing expectations. FOMC minutes from July 30-31 show policymakers were already advocating for rate cuts, which Fed Chair Powell reinforced in his Jackson Hole speech, hinting at a potential significant cut in September. Consequently, the US dollar's decline to its lowest in over a year has made dollar-denominated commodities cheaper for foreign buyers.

Energy Costs (Bearish, Partially Priced In):

Natural gas prices remain depressed. The October contract is up 3c for the week ending Sept 13, since reaching the highest levels since July. 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, Mostly Priced-In):

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.

Speculative positioning in the aluminum market is heightening volatility, particularly as Trafigura holds over 40% of the open positions in the LME’s October contracts, up from 30-39%. This has driven the October-November spread to a $22 premium, reflecting concerns about a market squeeze. Traders are facing higher costs due to a controversial administrative fee hike by Istim Metals LLC for re-registering metal in LME warehouses, complicating the situation. The combination of large long positions, lengthy withdrawal queues, and rising costs has led to growing tension, with traders raising complaints to regulators as the October contract’s expiration looms.

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.  

Chinese Stimulus (Bullish, Partially Priced In):

China’s Politburo has pledged increased fiscal spending, “forceful” rate cuts, and stabilization of the property sector to meet annual economic goals, including easing restrictions on home-buying in major cities that support base metals demand. Investors are watching for signs that these measures will help lift the property sector from its prolonged slump. China’s real estate industry is a globally significant driver of metals demand.