MI Comment: Aluminium dives as investors flee

As we signed off on Friday aluminium prices were under pressure, after SHFE stocks had risen 56,000t in the first week of the Lunar new year, while the rest of the metals complex remained nervous on the back of losses in equities and other markets. Before we went to press prices had come off from 2794 to 2753 and bounced back halfway, though more pressure came later as pre-weekend liquidation from the speculative community savaged zinc values in particular. The usual safe haven of choice, gold, was being sold along with silver, while oil prices also fell in spite of US demand running at record levels. It was an old-fashioned 'dash for cash', as locals put it, with investors departing commodities and other instruments, waiting for the dust to settle from the fallout of the past week. However, others fared worse and after bottoming at 2730, aluminium just mustered a kerb close above the key 100-day moving average at 2742.

Amid talk that the dominant long was offloading nearby positions the C-3m spread softened significantly, though it was from Apr 4 onwards where tightness eased most. Apr4-18 ended at 9.00 contango (3.00c), while Apr-May was slashed to a linear 4.00c (0.50b). Forwards were cut too, with rates in 2007 in by up to $5.00/mth, though beyond there backwardations slipped by only $0.50-$1.00/mth throughout. With the LME's WC warrant banding report (comprising cumulative Warrants/Tom/Cash positions and reflected as a percentage of total open stocks) two days delayed, this morning's update contained one party with 90+% as at cob Mar 1st.

On Monday morning the new global financial world order was again challenged, this time by an unexpectedly strong set of Japanese Q4 capital spending data. The resulting boost in the yen renewed fears of rising interest rates there, causing borrowers of previously near-free funds to exit investments in order to return the cash. The resulting fall in the Nikkei index sparked another round of liquidation in Asia, setting the skids under just about everything else once again. In aluminium's case, LME trading resumed in Asia at 2746 and after a fleeting high at 2754, prices dived $80 to a low currently of 2674, on a whopping premarket turnover of 6,200 lots!

As at Friday evening, Cliff Green Consultancy eyed key support c. 2710, a decisive breach of which signalled falls towards the 2620 and 'even' 2550 areas, they wrote.