Gold glitters, but other raw materials sparkle too
Comment of the Day

September 04 2020

Commentary by Eoin Treacy

Gold glitters, but other raw materials sparkle too

Thanks to a subscriber for this report from Bank of America Securities. Here is a section on aluminium: 

Eoin Treacy's view

Here is a link to full report. Here is a section: 

As a result, surpluses have been building, with prices holding up nonetheless and even rallying of late. A lot of this is linked to inventory management through the supply chain. Indeed, market participants have various options to store excess metal:

Historically, London Metals Exchange warehouses have been the preferred option because metal held within the LME system can ultimately be monetised easily. That said, exchange regulations have become more onerous.

Hence, market participants have prioritised metals storage in warehouses that are linked to the LME, without actually warranting the aluminium, ie the metal is held in a warehouse that can operate on the exchange, but it is stored in a section that is not a designated part of official stocks.

Meanwhile, some traders own their warehouses, so they can store metal entirely outside the LME; these facilities often still have the logistics to facilitate the delivery of metal into exchange stocks.

Finally, and further downstream, metal can also be held on consignment by an aluminium consumer. In this case it is financed and owned by a trader or bank and released to the costumer as needed. Putting concrete numbers behind inventory dynamics, squaring off the increases of global aluminium production by 0.8% YoY in March and April with demand declines of 30% YoY in those two months suggests that the global market was oversupplied to the tune of 2.1Mt during the height of the pandemic. And, indeed, global inventories have risen, as Chart 4 highlights. Yet, the data also outlines that much of the deliveries into warehouses came through in unreported stocks in both China and World ex-China. London Metals Exchange inventories are higher as well (Chart 5), but nowhere near as much as the market imbalances would suggest.

In our view, this has two implications. Firstly, as long as the excess aluminium is held in unreported stocks and not dumped onto the physical market, prices can be supported. Financing deals have returned between 2% and 4% annualised (Chart 6), so the risk for aluminium to make its way out of unreported stocks is low, for now. Secondly, with the LME no longer the residual market and an indicator for fundamentals, inventory changes on the exchange have limited informational value. This is mirrored by Chart 7, which outlines that the usual inverse relationship between aluminium inventories and prices no longer holds.

Considering the depth of the pullback on Wall Street yesterday and in the initial weakness today it would have been reasonable to expect a more pronounced impact on industrial resources today. In fact, the sector shrugged off tech sector volatility and a number of the industrial resources closed higher in a dynamic fashion.

Aluminium has been trending lower since early 2018 but found near-term support in the region of the 2015 lows in March. It rallied over the last six months to break the downtrend but some consolidation is likely before the recovery is improved upon.

Copper has spent the last two months ranging around $3. The price rallied impressively today to countermand yesterday’s weakness and a sustained move below $2.80 would be required to question medium-term scope for continued upside.  

Regardless of the political outcome, once the coronavirus is conquered infrastructure is likely to be a significant theme in most countries. There is both a need to build or replace large pieces of transportation and energy infrastructure and a requirement to find work for millions of unemployed people. That’s likely to be beneficial for industrials resources.

Back to top

You need to be logged in to comment.

New members registration