Time to buy aluminium

2005-09-24

Barclays Capital reports a bearish technical chart picture for aluminium has attracted some substantial short fund positions in the 3-month contract in recent days, keeping prices near the US$1800/t level, and highlighting subdued price performance compared with copper. Buying that has occurred in aluminium has been more focused on far forward contracts causing the curve to flatten. Barclays suggests this is driven by structural market issues such as rising input costs at smelters (alumina and energy), and continued strong growth in Chinese aluminium consumption (China's aluminium semis production was up 25% in the first eight months of the year). More technical selling pressure in the 3-month contract looks likely over the next few days, the analysts suggest. However, from a fundamental standpoint they see downside risk below US$1800/t as extremely restricted and are recommending consumers and investors to take advantage of price weakness. Next week, market participants will gather at Metal Bulletin's 20th Annual Aluminium Conference in Atlanta. Barclays believes sentiment is likely to be upbeat due to Chinese exports of primary aluminium being significantly lower following changes to the tax scheme, and due to lower LME prices. US mill product orders show signs of improving, with rolling mills and extruders reporting interest in restocking amid higher demand expectations after Hurricane Katrina, the analysts report. (As we speak, Hurricane Rita has just been upgraded to Category 5 with evacuations commencing in Texas and Louisiana ahead of a likely weekend landfall.) Barclays furthermore notes LME stocks are lower, and cancelled LME aluminium warrants have started to rise again (now representing 10% of the total remaining). Moreover, yesterday the International Aluminium Institute (IAI) reported a slowdown in year-on-year growth in western world primary aluminium production for the first time in a year. In light of these factors, says Barclays, "long position holders at the front-end of the curve appear under-populated to us". I think that means buy.