The factors are repositioned when there's movement in prices and/or supply/demand balances.
Recent News:Base metals along with other commodities weakened this week as China's $1.4 trillion debt refinancing plan underwhelmed investors, failing to deliver new stimulus. While there had been initial optimism for additional economic support, the plan focused solely on refinancing local government debt through 2028 without addressing broader growth challenges. The strong U.S. dollar, fueled by Donald Trump's election victory, further pressured commodity prices, including copper, zinc, aluminum, and nickel. Investors are now awaiting clearer signals of a recovery in China's economy amid trade uncertainties. (Bloomberg)
Alcoa has declared force majeure on bauxite supplies from its Juruti mine in Brazil due to a stranded vessel blocking the channel near the port, a disruption that could further tighten global alumina supplies as production struggles worldwide. This issue impacts supply to the Alumar refinery, where Alcoa has a significant stake, and comes as alumina prices have surged to multi-year highs, with Australian alumina at $723/mt on Nov 7, up $373/mt since the start of this year and the highest level since Platts started the assessment in August 2010. With supply disruptions in Guinea, Australia, and high demand from China, the outlook remains tight for alumina buyers. (Bloomberg)
US tariffs on Chinese aluminum, currently at 25%, may increase under Trump, yet the impact on China’s major producers like Chalco and Hongqiao is expected to be minimal due to their limited export volume to the US. Since anti-dumping measures began in 2016, Chinese aluminum exports to the US have fallen by over 65%, now representing only 4.5% of China’s total exports. After a 10% tariff was introduced in 2018, some Chinese companies, such as Innovation New Material Technology, began planning production in Mexico to leverage the US-Canada-Mexico trade agreement for better market access. (Bloomberg)
Global Supply Demand (Bearish, Priced-In):
Chinese aluminum demand has remained weak despite some signs of improvement in economic data. Meanwhile, production in China has surged due to improved electricity supply in regions previously impacted by drought. China's Global aluminum production continues to rise, with China being the leading producer.
USD (Neutral, Priced In):
The US dollar index had a sixth consecutive weekly gain, climbing above the 200-day SMA, supported by a 25 bps Fed rate cut and renewed investor confidence tied to potential Trump policies. Trump’s proposed tariffs on China and Europe are expected to stoke inflation, while Republican-led tax cuts might offset growth impacts, though potentially widening the budget deficit. Fed Chair Jerome Powell indicated that while inflation remains a concern, further rate cuts could slow if inflation rises, with future moves contingent on labor market shifts. Economic resilience and US outperformance versus G10 peers underpin the Dollar's robust outlook.
Energy Costs (Bearish, Partially Priced In):
Natural gas prices remain depressed. As of October 31, the December contract was down 37c week-over-week, trading around $2.719/MMBtu. Mild weather outlook leading to lower heating demand and rising production continue to weigh on prices.
Economic Slowdown (Bearish, Surprise):
Central banks worldwide continue to battle inflation while trying to prevent a slowdown in economic activity. However, China is trying to fight deflation amid a property and housing market crisis. US manufacturing data, based on the ISM Manufacturing PMI, has shown signs of improving after being depressed for nearly two years. US economic indicators show mixed signals as inflation-adjusted spending rose 0.4% in September, buoyed by solid consumer demand and wage growth, while the personal consumption expenditures price index, excluding food and energy, rose 0.3%, the largest gain since April. Despite these gains, recent data reflect a cautious approach to further rate cuts, with unemployment benefits claims declining to a five-month low and employment costs showing moderated growth, signaling continued resilience but also a tempered outlook for rapid easing by the Federal Reserve.
US Elections/Govt Policy (Bearish, Partially Priced In):
The US elections could have a bearish impact on the global metals markets, particularly for oversupplied metals like copper and aluminum. The potential return of Donald Trump to the presidency introduces significant policy uncertainties, especially regarding trade tariffs. Trump has proposed a 60% tariff on Chinese imports, which would disrupt supply chains, decrease demand for metals, and exacerbate the current oversupply situation. This increased uncertainty could lead to lower industrial activity and investment, further pressuring metal prices
Keep an eye on inflows/outflows of Russian and Indian-produced aluminum in LME warehouses due to sanctions/bans and LME’s proposed carbon tracking program. The Biden administration has imposed new tariffs on steel and aluminum shipments passing through Mexico to prevent China from evading existing levies. Effective immediately, the measures impose a 25% tariff on steel not originating from Mexico, the US, or Canada, and a 10% tariff on aluminum from China, Russia, Iran, or Belarus routed through Mexico. Coordinated with Mexican President Lopez Obrador, this move aims to curb metal influxes into the US market and address oversupply concerns from China, safeguarding domestic industries.
Raw Materials (Neutral, Partially Priced In):
Raw material supply is adequate outside of copper. Copper mine supply has been tight for a while but reports suggest refined copper supply is able to meet current demands.
Speculative Positioning (Bullish, Mostly Priced-In):
Investment funds, which are purely speculators in the aluminum and copper futures markets, can have a significant impact on financial prices. According to CFTC Commitment of Traders data, speculators remain net-long in Copper and Aluminum markets and boosted net-long positions in LME aluminum to a 19-week high.
Speculative positioning in the aluminum market is heightening volatility, particularly as Trafigura holds over 40% of the open positions in the LME’s October contracts, up from 30-39%. This has driven the October-November spread to a $22 premium, reflecting concerns about a market squeeze. Traders are facing higher costs due to a controversial administrative fee hike by Istim Metals LLC for re-registering metal in LME warehouses, complicating the situation. The combination of large long positions, lengthy withdrawal queues, and rising costs has led to growing tension, with traders raising complaints to regulators as the October contract’s expiration looms.
Geopolitical Risk (Bullish, Surprise):
Considering the turmoil hitting several countries in the eastern hemisphere, we decided to add this factor. However, headline risks have the potential to move prices in the near-term.
Chinese Stimulus (Bullish, Partially Priced In):
China’s Politburo has pledged increased fiscal spending, “forceful” rate cuts, and stabilization of the property sector to meet annual economic goals, including easing restrictions on home-buying in major cities that support base metals demand. Investors are watching for signs that these measures will help lift the property sector from its prolonged slump. China’s real estate industry is a globally significant driver of metals demand.
China’s latest stimulus package, approved by the National People’s Congress Standing Committee, aligns with prior estimates, allocating 10 trillion yuan ($1.4 trillion) to address local government debt. However, investors hoping for more substantial fiscal support following Donald Trump’s re-election were disappointed, especially with Trump’s 60% tariff threat on Chinese imports.