by Raul de Frutos on AUGUST 18, 2016

Style:Market Analysis

Category:Commodities, Macroeconomics, Metal Prices, Non-Ferrous Metals

Three-month Aluminum on the London Metal Exchange hit a new 13-month high this week, retaking the $1,700 level.

Three-month LME Aluminum hits 13-month high. Source: MetalMiner analysis of Fastmarkets data.

Recently we talked about the decline in aluminum exports this year. China exported 390,000 metric tons of unwrought aluminum in July, down 9.3% from July of last year. Chinese aluminum exports have fallen around 7% for the first seven months of 2016. Lower aluminum exports are supporting aluminum prices this year.

Despite the fall in exports, the U.S. is considering asking for a reclassification of aluminum products to stop a flood of “fake semi-finished” aluminum products entering the global market. The reason is that Chinese aluminum exporters seem to be avoiding export duties while simultaneously qualifying for Chinese export subsidies for semi-finished products, for products that are being shipped specifically for remelting as unwrought.

The proposal is still in draft form and must be approved by the World Customs Organization before it could come into effect, a change that is unlikely before next year, if at all.

Weaker Dollar

One macro factor contributing to the rise in aluminum price this month is a weaker dollar since late July. Aluminum, like any other dollar-denominated asset tend to move inopposite directions to the dollar. The dollar rose as the pound sank following U.K.’s vote to leave the EU, but the pound stabilized in recent weeks.

The U.S. dollar index falls since late July. Source: MetalMiner analysis of @stockcharts.com data.

In addition, expectations that the Federal Reserve would raise rates this year combined with easier monetary policy elsewhere would make the dollar more attractive to yield-seeking investors, but things are going the other way. The Fed is not raising rates and countries like Japan are not easing monetary policy as much as investors had expected. Consequently, the U.S. dollar has fallen, giving a boost to dollar-denominated assets such as aluminum.

Oil Prices Rebound

Oil rebounds in August. Source: @stockcharts.com.

Finally, a rebound in oil prices in August is a good sign for increasing aluminum prices. Oil is not just a commodity, itself, but an asset closely followed by commodity investors. Rising oil prices lure investors into commodities and, of course, industrial metals.

Also, oil is the main benchmark for energy prices. Lower energy prices mean lower transportation costs and lower production costs, especially for those energy-intensive metals like aluminum.