CRU Aluminum: Prices Lifted by Softer US Inflation Report

Likewise, the easing of Covid-19 lockdown restrictions lifted China’s SHFE terminal market and followed the gains made by the LME this week, up 2%. The SHFE cash contract first settled at RMB19,180/metric ton and was last seen trading at RMB19,340/metric ton as some optimism returned to both China and European markets. While these market fundamentals appear encouraging, consumers are still leery of the disease and may be slow to return to the streets and business as usual.

Softer US Inflation Report Gives More Hope for Less Monetary Tightening

The annual rate of inflation in the US slowed to 7.1% year-over-year (YoY) in November from 7.7% in October, the lowest reading since the end of 2021, and well below the recent peak of 9.1% YoY in June. Meanwhile, the core rate of inflation, which excludes food and energy, rose 0.2% YoY. This is the smallest gain since August 2021.

The reading lifted the equities markets this week. Market participants hope easing inflation will let the Fed scale back interest rates hikes. The Fed raised its benchmark interest rate Wednesday by another 50 basis points, but it is a noted step down from the 75 basis point hikes in the prior meetings. This latest increase is the seventh increase of the year, moving the federal funds rate to 4.25–4.5% from a starting point near 0% at the beginning of the year. These moves by the Fed are the most significant response to rising interest rates in nearly 40 years and the 4.25–4.5% federal funds rate is the highest in 15 years.

The successive interest rate increases are slowing the inflation surge, now 2% below its peak. The Fed has a stated goal of curbing inflation to a 2% target. While the 50-basis point increase is less than the previous four moves, the central bank’s view remains that 7.1% is far too high to sustain a growing economy, consequently, further adjustments are expected in 2023.

LME COTR Update: Investors Take Quick Profit as LME Rallies

According to the latest Commitments of Traders Report (COTR) published by the LME and covering the week ending Dec. 9, there was some light profit taking last week by long position holders right after the LME touched a new six-month high at $2,577/metric ton on Dec. 5. Gross long positions were cut by 6,600 lots and are back to their lowest level since late October. This indicates that, despite the LME price rushing to $2,500/metric ton and above early last week, this did not inspire a build-up in additional long positions. Quite the contrary, in fact, as investors saw this as an opportunity to take some profit. The move also prompted the short position holders to further cut their exposure, with the gross short position now down to 51,000 lots only – the lowest that the short exposure has been since mid-August.

Overall, this shows that $2,500/metric ton is not seen as an important resistance level despite offering resistance through the summer. Perhaps a break of $2,600/metric ton will be needed to revive investors’ interest. $2,600/metric ton is a level that offered good support back in November and December last year before prices started a rally that would take the LME to its historical high of $4,073.50/metric ton at the start of March.

Watching for the End of the Destocking Phase

Several aluminum semis end-use market segments have been pumping the brakes and downshifting steadily throughout the second half of 2022. Building products, durable goods and even the volume workhorse, the aluminum beverage can sheet, have had their full year 2022 demand figures lowered. As the fear of short supply, which was the reoccurring theme in H1 2021-2022, ran head long into the reality of 9.1% peak inflation, inventory managers began bleeding off inventory. Doubling down on purchases whether for supply chain bottlenecks, or short staffing happened at the time metal prices were at their peak. As demand slowed, the weight of high cost working capital compounded the task to whittle down inventories to meet year-end performance objectives.

By year’s end, overall North American rolled products demand will be +6% ahead of the 2021 tally which was +11% stronger than 2020. Only durable goods, which were wildly overbought in 2021, will show demand decay YoY by -1.5%, finding it difficult to follow-up 2021 which outpaced 2020 by 20%. Packaging and transportation end use demand will finish up the year +8% and +7.5% respectively.

The next chapter will be written about how buyers come back to market in 2023 after the destocking phase concludes. In early January 2023 they are likely to find the LME and Midwest premium higher than where they last bought-in alongside conversion fees which will also be higher on the strength of the domestic demand portfolio forecast for 2023, up again by +7.5%.

By Stephen Williamson, CRU Research Manager, stephen.williamson@crugroup.com