Aluminium prices have been strongly impacted by the decline of the global demand, whereas the offer was increasing significantly due to the massive investments realised these past years in production capacity.
As a result, this disequilibrium generates several consequences, where the most important one is of course the severe decline in prices since last July.
At the beginning of the year, the stock was of 929,000 tonnes of aluminium on the London Metal Exchange (LME). As the offer increased but the demand slowed, the current stock is now above 1,600,000 tonnes. It’s a surge of 72% in 11 months.
The production margins are very tight now. Between 30 to 50% of the costs are energetic as producing aluminium is highly-consuming in electricity. Currently, the average cost to produce one tonne of aluminium is around US $2,000. As the price on the LME is now below $1,900, it means that the industry experiences large difficulties as 40% of the aluminium producers are not profitable anymore.
Consequently the production decreases now, and factories close regularly. For instance, Alcoa, one of the biggest players in the world, has reduced by 15% its production. The Chinese Chalco has also reduced its capacity significantly. China is the biggest producer in the world, and is a huge exporter too. The slowing economic growth over there could impact even more the aluminium market.
The experts expect that around $50 billion of investments will be delayed in 2009. With the growing inventories, the bear market is likely not over yet.
Technically, aluminium prices haven declining continuously for 4 months now. The original bullish trend started in July 2005 (point A on the chart) posted a high in May 2006 (point B) and more recently in July 2008 (point C), just below $3,300 a tonne. Points B and C built a long-term “double-top” pattern which is a trend reversal signal. The key support around $2,300, which is the 61.8% Fibonacci ratio of the bull market occurred between points A and B, was cleared in early October. It was a signal for a further decline. The current price is now around $1,870 and the next potential support is set $100 lower, at $1,770 (dash line).
Since the high of July at $3,291, prices fell by 43%. The immediate resistance is the 20-day moving average (in red) where the price action failed in late October when it started to bounce back. A complete retracement towards $1,675 (level of point A) is expected and build a “double-bottom” pattern therefore a basis for a rebound.
Good Investing,
Gabriel
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