January 6, 2023

LME aluminum prices have tumbled nearly 5% in the first trading week of 2023, due in part to concerns that a “vicious virus wave” in China could hinder the country’s factory activity in 1Q 2023, according to Bloomberg. AEGIS notes that surging COVID cases, along with weakening demand and logistical issues have already weighed on China’s manufacturing activity in recent months. For example, the Caixin/Markit manufacturing purchasing managers' index (PMI), which is a widely used gauge of China’s manufacturing activity, fell to 49.0 in December, down from 49.4 in November. To interpret this index, we note that readings above 50.0 indicate that an industry’s activity is increasing, while readings below 50.0 signal contraction. Based on this metric, China’s manufacturing activity has been contracting since August 2022. (Sources: Bloomberg, Reuters)

This week’s pullback in LME aluminum prices adds to the nearly 15% drop that occurred last year. Despite the negative headlines and worries over short-term aluminum demand, analysts interviewed by Reuters feel that China’s recent relaxation of its COVID policies could lead to an uptick in economic activity, and therefore aluminum demand, later this year. This could ultimately push aluminum prices higher. Aluminum end-users that are concerned about increasing prices could consider buying swaps or call options, as either would establish a maximum aluminum price. Such positions are standard for consumer hedging; however, they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (1/6/2023)

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Price Indications

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Important Disclosure: Indicative prices are provided for information purposes only, and do not represent a commitment from AEGIS Hedging Solutions LLC ("Aegis") to assist any client to transact at those prices, or at any price, in the future. Aegis makes no guarantee to the accuracy or completeness of such information. Aegis and/or its trading principals do not offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Certain information in this presentation may constitute forward-looking statements, which can be identified by the use of forward-looking terminology such as “edge,” “advantage,” “opportunity,” “believe” or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities.