The aluminum prices are currently consolidating in the range of 2550-2660 after a strong growth in the first half of January. As long as there are no strong triggers to get out of the sidewall, it is possible to use a rebound trading strategy from one border to the other. For instance, that method worked very well for the silver market. As for aluminum, there is a sideways move to the lower boundary, around 2550.
While the Chinese economy is still in the very beginning of its recovery, the demand for aluminum shows no significant growth. Moreover, for now China itself got a surplus of this metal, so the country sends it on export to other countries. Considering the fact the cost of gas and, consequently, electricity in Europe has stopped growing, aluminum producers in the Europe may increase production, what was drastically reduced last year. So it may put pressure on aluminum prices.
Demand from another important aluminum consumer, Japan, is also not all right. According to the media, the premium for aluminum supplies to Japan for Q1 2023 is set at $85-86 per ton over the price on the London Metal Exchange, which is 13%-14% less than the premium for Q4 2022.
Reduced premium indicates weak metal demand and its excess in the market. The premium has been decreasing for five months in a row, down to its lowest level since Q3 2020. That was driven by the slow recovery of Japanese car production, as well as sufficient stocks of aluminum from local companies. At the end of December 2022, aluminum stocks in Japan increased to 381.83 thousand tons, compared to 296.5 thousand tons in December 2021.
The bears' goal for now is reaching the lower boundary of the sidewall, i.e. the level of 2550.
The following version of trading strategy might be offered:
Sell aluminum at the current price. Take profit – 2550. Stop loss – 2620.
Traders may also use Trailing stop instead of a fixed Stop loss at their convenience.
This content is for informational purposes only and is not intended to be investing advice.