Welcome to January…..and 2024.
There have been a few changes in the aluminum world since last month. Aluminum scrap demand has picked up in a few arenas over the past 30 days with the most notable being demand for aluminum can sheet inputs (namely UBC). This uptick is seasonal in nature as generation flows of these grades slow in the colder, winter months and holidays/weather provide challenges in physically getting material moved. There might even be a little uptick in coil demand as well as the consumers and their customers have concluded their destocking activities. While the other segments aren’t necessarily there yet, I do think we should see some improvement in demand as we ease into 2024 on other industry fronts.
After a disappointing first half of December, we’ve seen a dramatic turnaround that’s not only recouped early month losses but pushed LME to its highest levels since in 7 months – nearly $200/ton higher than the start of December. Biggest drivers for the rally have been a cooling of inflationary data and recent bauxite supply concerns in Guinea. With the Fed’s preferred inflationary gauge coming in below expectations, and the 6-month rate below the Fed’s 2% target, there is a growing belief that we may see interest rate cuts as early as spring 2024. This speculation has eased the dollar’s strength which tends to have an inverse effect on metals given that the LME is dollar based (see below chart). As the dollar weakens against other currencies, the LME become more attractive to investors and spurs buying activity. The second driver was a massive fuel depot explosion in Guinea that took nine days to extinguish. Guinea is the world’s 3rd largest bauxite producer, bauxite being the primary input into smelting primary aluminum. With concerns of a supply disruption, bauxite prices spiked 7% to an all-time high and are driving up aluminum pricing.
What’s my crystal ball say? Always tough but my read is that the bauxite fears are overblown and that LME might be a bit oversold right now. Despite all the headline whirlwinds, inventories into LME warehouses are up 24% over the past 2 weeks. That tells me that despite all the positive inflation news and bauxite hoopla, supply is outpacing demand and in the end, that will weigh on short-term aluminum prices as we start 2024.
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Let’s get it in 2024!