Aluminum Hits 4-Month Highs On Russia Scare; Charts Signal 'Rally With Legs'

The Russia-Ukraine conflict hasn’t just sent oil and gas prices through the roof. Metal prices are caught in the upwave too, with Russia’s position as a major commodities producer skewing the situation.

We wrote a week ago about the rally in palladium on speculation of a supply squeeze at Russian mines despite production continuing as per normal. Now, we have aluminum at four-month highs.

Worries that the Nord Stream 2 gas pipeline will be shut down if Russia invades Ukraine sent aluminum to October peaks when trading opened on the London Metal Exchange on Tuesday. Aluminum is a metal that requires extensive energy to produce and gas is the primary fuel for that.

Russia is also a major aluminum producer and the threat of US and other Western sanctions on Moscow if it attacks Ukraine has intensified supply concerns over aluminum.

Charts courtesy of skcharting.com

In 2018, US sanctions on Russia and its aluminum giant United Co. RUSAL (MCX:RUAL) fueled a spike in global aluminum prices.

Aluminum prices have rallied without stopping since the end of November, gaining 7% in December and almost 11% since the start of 2022.

Also supporting the rally were dwindling LME inventories of the metal and coronavirus curbs in the Chinese city of Baise, which hit transportation of raw material alumina, Reuters reported.

On Tuesday, three-month aluminum on the London Metal Exchange was up 2.6% at $3,170 a tonne, after earlier hitting a peak since Oct. 19 of $3,172.

Aluminum stocks in LME approved warehouses fell to 768,250 tonnes, their lowest level since February 2007.

The premium of LME cash aluminum over the three-month contract has risen to $40 a tonne, its highest since July 2018, indicating tightening nearby supplies.

In Asia, the most-traded March aluminum contract on the Shanghai Futures Exchange rose 1.4% to 22,465 yuan ($3,533.90) a tonne. Earlier in the session, the contract hit 22,615 yuan, a peak since Oct. 22 last year.

Antaike, a Chinese government-backed consultancy, said in a statement on Monday that part of local alumina production has been affected by the COVID-19-related restrictions in Baise in the Guangxi region and more producers saw transportation disruptions.

Supplychaindrive.com reported in its 2022 outlook that aluminum was one of five products expected to be in tight supply this year, blaming it partly on the gas price rally.

Surging natural gas prices in Europe have also pushed some producers to curtail production, exacerbating the global supply situation. Europe lost more than 650,000 tonnes of annual production capacity since the rise in energy prices began in October, European Aluminium wrote in a letter to the EU Jan. 14.

Tight supply of aluminum has created problems for the construction industry and for beverage makers who have had trouble getting their hands on enough aluminum cans. For example, Monster Beverage (NASDAQ:MNST) "was not able to fully satisfy increased demand" in the third quarter due to can shortages and other supply chain challenges, co-CEO Rodney Sacks told analysts in November.

China curtailed production of aluminum and other energy-intensive metals last year as part of its plan to reduce carbon emissions, and a report from ING Group found primary production in the country to be 1.2 million tonnes below the bank's expectations.

Still, aluminum can producers have invested in new projects to ramp up capacity in the US—in September, Ball Corporation (NYSE:BLL) announced it would build a $290 million packaging plant in Nevada. But with the plant not expected to come online until late 2022, the company predicts demand will continue to outstrip supply in the short term.

"Early insights into 2022 is we're significantly oversold again," President Dan Fisher said in a November earnings call.

But what do aluminum’s charts say? Does this rally have legs?

Sunil Kumar Dixit, chief technical strategist at skcharting.com, noted that aluminum was just behind the October peak of $3,198 and could reach a new peak as high as $3,458.

“The bullish momentum is further supported by positive crossover in the monthly stochastic, with a reading of 72/64 which has ample potential for a continuation of the upside,” Dixit said.

The metal was currently testing the roof of a $676 swing from the October high of $3,198 and November low of $2,522, he said.

Short-term price consolidation may cause sideways action with mild corrections to fill out the run away gap left between $3,063 and $3,110, Dixit said.

A break below the 5-week Exponential Average of $3,049 and $3,008 will be the initial sign of exhaustion, with potential corrections to test the $2,850 and $2,600 major support zones, he said.

“However, despite possible corrections, if prices consolidate above $2,850, which is the 50% Fibonacci level of the $676 retracement, there are more chances of a breakout above $3,198 and creating a new high than momentum running out of gas,” said Dixit.

“Breakouts above $3,198 can extend the rally to test $3,358 and $3,458 as initial legs higher.”

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.