MI WEEK IN REVIEW: Dubai conference fails to lift the aluminium gloom

Most of the great and the good in the world of aluminium were attending last week's Metal Bulletin conference in Dubai. Normally these affairs generate something of a feel-good factor that lifts the collective spirits. Not so this time, however. Perhaps it was because of the conference's location, bringing with it a host of local speakers talking about the ever-growing number of smelter projects planned for the energy-rich Gulf region. More likely it was the continued sense of pending gloom that hangs over the entire financial world as a result of the ongoing credit crunch and inter-bank liquidity crisis. The latter claimed its latest victim in the form of a bail-out of the UK's eighth-largest bank—Northern Rock—by the Bank of England. Further proof, if it were needed, that sub-prime mortgage risk has been channelled down invisible and unforeseen channels through the international system. Equally, sentiment was hardly likely to be impressed by the current surge of metal from off-market onto LME warrant, each day currently bringing with it another bumper net increase in the exchange's stocks of the light metal. Muted For these reasons, aluminium put in a muted performance last week. Trading was at times highly illiquid across the LME complex. Some of the biggest hitters from the hedge fund community have gone quiet. The gossips on the London "street" point to reports of heavy losses during the recent market turbulence. More likely is that many hedge funds—and just about everyone else—are sitting on their hands until they see which way the Fed swings at its meeting tomorrow. Generally subdued LME trading was of course compounded In aluminium's case by the presence of many market participants in Dubai. That may have helped on the downside with LME 3-month metal showing little inclination to tackle key support at the $2,400 level. Lows of $2,420 were seen on Monday and Tuesday but trade bargain-hunters did enough to prevent it falling further. On the "up" side aluminium under-performed on the Tuesday and late-week bounces seen across the LME metals. To some extent these were a reaction to rallying equity markets and/or gold and/or oil (pick according to preference). To a greater extent, we suspect, it was a case of proprietary desks tweaking the huge collective short positions accumulated by the CTA systematic fund community. Aluminium made it as far as $2,480 at the Thursday close—short of resistance at $2,500—and then gave most of it back for a Friday close at $2,430. The other metals closed the week out with varying portions of their gains intact. Not so the light metal, which recorded a week-to-week loss of $17. Stocks Rise Dampening any bullish bursts of enthusiasm is the accelerated up trend in LME stocks. They rose by another 28,675t last week and the headline figure re-gained the 900,000t level for the first time since July 2004. We seem to be seeing a wholesale movement from the off-market to the on-market sphere. Poor demand, particularly in North America, financeable contango on the front part of the curve and rumoured incentive deals from some warehousing companies are sucking metal into the system. Physical premiums everywhere appear to be soggy and those for Q4 shipments to Japan fell to $65-66 over LME cash from the Q3 level of $68-69. Japanese buyers pointed to an under-performing domestic consumption profile as justification for the decline. As we noted in our Friday issue, however, not all is quite what it seems this time around on the Japanese premiums. Producers came to the talks with an unusual split in offers. Those in Australia came in higher—before bringing their offers back into line with the consensus elsewhere—reflecting their view of strengthening local demand in the region outside of Japan itself. That may be a sign that things are starting to shift in the likes of the South Korean market, which has become very dependent on exports of Chinese metal. After the imposition of an export tax on primary aluminium and the elimination of rebates on many aluminium products, China's continued export strength is looking a lot more uncertain than at any time in recent years. Japan is normally the benchmark setter when it comes to quarterly premiums in the Asian region. This time around, though, it will be interesting to see whether South Korean premiums gravitate to the Q4 level achieved in Japan or open up a split based on expectations of lower exports from China. Forward Strength In stark contrast to the short-term problems weighing on the light metal, the Dubai conference generated a good deal of optimism about the future price outlook. Demand growth in the developing world and a rising cost base everywhere are the twin themes at work here. Of course, far-forward buying has been a feature of this market for many months and it still shows no signs of abating. Our current favourite aluminium price chart is the following, showing the evolution of the forward curve over the course of this year. The key point here is the change in the curve since the start of August. The LME cash aluminium price has fallen by $309 in that period. The 63-month aluminium price (Nov 2012) has increased by $101 over the same period. The cash premium to Nov 2012 is a narrow $90. Forward strength remains a key part of this market. Nearby price weakness is also a key part. There is still a massive CTA fund short position on the nearby months—something like 97% of historic capacity, according to our sources. It is betting on a break down through the $2,400 level. Contrarians argue that it is also highly vulnerable to any sustained price rise. We suspect that it and overall direction will be determined tomorrow by what the Fed says and does.