MI WEEK IN REVIEW: Even as recently as the short trading week between Christmas and the New Year, London locals were nervously eyeing the aluminum charts and warning that a break of resistance at $2,858, basis 3-month metal, could herald a spike up to the $3,000 level.
However, one week into the new year and that looks like a legacy concern. LME 3-month metal fell by $195, or 7.0%, to $2,608 at Friday's close, sucked down by flailing copper and prone to the same aggressive selling by the CTA systematic fund community, who have once again ventured into short position territory on the light metal, according to our sources.
Anomalies
Yet, there is one key difference between the two LME flagship contracts. While the bear attacks on copper have been facilitated by the contango across the nearby market structure, the tightness in the aluminium market which reappeared in the run-up to the December prompt date has not only carried over into 2007 but seems to have got worse.
The benchmark cash-3s period ended last week valued at $40 backwardation and you have to go back a long way in time—October 2004 to be precise—to find the LME market as tight as that. The persistence of backwardation belies the view that December 2006—with its big open interest on both futures and upside call options—was going to be a one-off squeeze on the cash date.
Rather, we seem to be in for a protracted period of nearby market tightness, much in contrast to copper, where contango has become the order of the day.
That technical tightness is being mirrored in one of the big geographical physical markets-- Europe .
Global exchange stocks built by around 26,500t in December but that overall rise masked a continued squeeze on visible tonnage in Europe , where stocks now look very low. The picture looks even more extreme when you factor in the sharp attrition of producer stocks in the region, which fell by 189,000t in the 11-month period through end-November 2006.
That made Europe the single biggest driver of the overall 248,000t decline in global (non China ) producer inventories in the first 11 months of last year. Falling producer stocks were in turn the biggest driver in the overall reported stocks decline last year—exchange stocks fell by a highly modest 13,805t last year.
By contrast, the market in the US looks decidedly soggy with consumption of primary undermined by weakness in the automotive and residential housing sectors as well as by reportedly good availability of secondary metal. Indeed, the Platts assessment of the US Midwest premium fell to its lowest level in over three years at the back end of December and regional weakness has been all-too-evident in the surge of arrivals in both the LME and NYMEX warehouse systems.
Questions
The Asian physical market appears to be bearing up reasonably well and Chinese consumption growth figures continue to generate a warm glow for the market bulls.
However, the region will have to contend with the uncertain play-out of the ongoing cat-and-mouse game between the Chinese authorities and local players in terms of the adjustments to the country's export tax regime. The hike in the tax to 15% on ingot late last year should feed through into lower exports this year but will the authorities now turn their attention to rocketing exports of alloy and aluminium product?
Similar tax issues continue to vex the trade in Europe . Will the European Union make good on its stated intention of slashing the import tax from 6% to 3% and if so, when? The current uncertainty has make quoting physical market premiums a nightmare for local players will all sorts of retroactive duty-related options having to be formulated on new contracts.
Beyond these physical market conundrums, however, lies a more varied appraisal of aluminium's fortunes this year than we've seen for a while. The script appeared set in stone for aluminium to weaken from its 2006 highs above t
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