MI Comment: Liquidation talk drags aluminium down

As we signed off for the week on Friday the LME complex remained under pressure, with aluminium slipping towards technical support pegged by Cliff Green Consultancy c. 2660/70. Talk among London's locals continued to centre around mega-liquidation from the metals markets' two most influential index funds. The theory of choice (among bears, anyway) was that the pair would reduce metals holdings in their portfolios to a level where their total contract value matched that of this time last year. Due to the past year's massive appreciation in metals values, the number of contracts required to be held was of course much smaller, which is why most locals have been running scared. There remained a number of contrarians in the market, though the herd was not for turning on Friday.

Aluminium bottomed at 2660 in the premarket and found support there for a while, though it was a stronger-than-expected US employment figure that nudged the dollar higher and sent gold prices reeling. The base complex suffered too and after the light metal slipped through support at 2660 it failed to find enough buyers to prevent a slip through the 100- and 200-day moving averages as well. A $100-fall had been anticipated by technicians and long liquidation dragged the market to an afternoon low of 2575.

Talk of massive index fund liquidation and of rolls of the remaining longs starting this week had no dampening effect on nearby tightness, however, as consumer buying during the fall saw rates tighten throughout C-3m. Jan17-Feb08 grew to 19.00b (16.25b), while Feb08-21 ended at 3.00b (0.25c). Forward tightness did recede with H2 2007 cut by up to $4.00/mth, while 2008 and 2009 slipped by $0.50-$1.50/mth, though later months all tightened by similar margins.

Aluminium business was brisk so far in Monday's premarket with 3-month turnover via Select approaching 5,000 lots. The overnight rebound had lifted prices to an early high in Asia of 2612, though by time of writing values had fallen deeper to 2550 before picking up to 2590 currently. Cliff Green Consultancy in their latest daily report put 'pivotal' support at 2560/70, with a clear and sustained break below there signalling a test of the 2470/90 and even 2400/20 areas, they added.