Does Latest Plunge Indicate Course Change or Brief Corrections for Aluminum Prices?

SHFE aluminum, which gained nearly 15% in just seven trading days, took a dramatic downturn on November 2, with SHFE 1611, 1612 and 1701 aluminum contracts all hitting daily downside limits.

SMM attributes the sudden tumble to the following factors:

First, technically, SHFE aluminum has shown signs of overbuying. Moreover, the first Wednesday of each month is the LME options declaration date, triggering profit taking by longs.

Second, high aluminum prices and spot premiums caused downstream producers to delay purchases. This, together with growing supply from smelters and inflows of imported aluminum ingots, pushed up aluminum stocks in domestic market and narrowing narrowed spot premiums. As of November 2, spot premiums were 280-320 yuan/tonne in east China market over SHFE 1611 aluminum, down 310 yuan/tonne from October 28, SMM data showed. Recent changes in spot market will not support gains in SHFE aluminum.

Third, judging from gold, silver and stock markets, growing expectations for Donald Trump to win US presidential election have caused risk aversion to grow.

SMM sees no large downside room for aluminum prices, though. Recent price declines will attract downstream producers to replenish stocks. Transport capacity remains tight and deliverable aluminum ingots are still limited. Rising alumina and coal prices have added to aluminum costs. All these will give support to aluminum prices.

Market needs to closely watch transport conditions and inventory changes. SMM sees small chance for aluminum prices to post big gains again in the future, citing softening consumption and growing supply. Distant month aluminum contracts on the SHFE underperform near month contracts, indicating pessimism over price outlook in the medium and long run.