Another band of producer selling kept the aluminium market in check last week but against a constant backdrop of short-covering by technical and Chinese players, most on the London “street” now seem convinced that the light metal's well-documented appointment with the $3,000 level in December is something of a racing certainty.
Resistance
Aluminium's rally from the September lows down towards the $2,400 level, basis 3-month metal, has been slow and purposeful with short-covering and industry pricing eroding producer selling at various levels on the way up.
The producers so far at least have been able to slow but not halt the advance, although they had a bit more success at $2,800 and above in the second half of last week.
Aluminium had closed the previous week at $2,808 and more momentum buying seemed to be at work on Monday, when 3-month metal made it as far as $2,830/5.
The CTA systematic fund community was still steadily buying back its collective short exposure, options market makers were covering the December date against the big exposure to call options on their books and extra impetus was coming from Chinese players liquidating their short-LME/long-Shanghai arbitrage plays.
The latest hike in the country's export tax to 15% has caused a rapid change of heart among Chinese speculative players with Shanghai futures going limit down on both Monday and Tuesday amid fears that there will be a big build in the country's inventories as exports weaken on the higher tax.
Short-term, however, the impact may work the other way around since there were mid-week reports of a scramble to get metal out of the country ahead of the Nov 1 deadline. That was blamed by some London locals for aluminium surrendering the $2,800 level and slumping back sharply to $2,720 on Wednesday afternoon before steadying for a close at $2,734.
In truth, we suspect a combination of factors at work. The producers—now focused on 2008 from what we hear—had been consistent sellers above $2,800 providing a band of liquidity to absorb the covering and a smattering of fresh month-start fund buying on Tuesday.
The ISM report on manufacturing in the US came in worse than expected, triggering a new round of doom and gloom on the state of the US economy. That in turn saw copper sink towards its key support at $7,000 and everything else with the exception of ebullient zinc follow it lower.
The move seemed to sucker in some of the shorter-term technical players with the CTA systematic community putting on fresh shorts after reducing their exposure to somewhere under 5% of potential capacity in the first couple of days of the week.
They will have lived to regret it, however, since aluminium simply picked itself up, dusted itself down and started moving back up towards $2,800, helped by the fact that copper—once again—avoided its own meltdown.
By Friday's close aluminium had made it back up to $2,787. It was a week-to-week set-back of $21 after six consecutive “up” weeks but not one that has caused any damage to the chart picture in terms of underlying upwards momentum. Check out the technical commentary, particularly the “preference” section, from our title sponsors Sucden UK Ltd at the bottom of this item for more on this.
Momentum
There was a notable easing in the market's nearby structure in the back end of the week, cash-3s ending valued back at $3.25 contango, a state it's not been in for a couple of weeks.
That may mark the completion of a lot of short-covering on the December date but locals are warning that there is more to come if the price goes any higher.
The bulk of the CTA community's short-covering seems to have been done now but with only one month to go, option market-makers will have one very beady eye on their delta-hedge commitments against those $3,000 December call options.
The last leg up on this rally—if the producer selling
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