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China’s appetite for metals is insatiable. Evidence from aluminium markets suggests a second wave of stockpiling is occurring as the Middle Kingdom’s industrial engine prepares for a recovering rest-of-world. Following a year that has dramatically disrupted supply, the ongoing stockpiling is having an outsized impact on price action in metals, Daniel Ghali, Commodity Strategist at TD Securities, informs.

Key quotes

“Strong aluminium prices in China help us construct a mosaic of information which reveals that a second wave of Chinese stockpiling may be afoot. China could be seeing a second wave of stockpiling ahead of an expected vaccine-related recovery in rest-of-world demand.” 

“Aluminium scrap production has significantly been displaced this year, which helped to ease the surplus of ingots. Investment flows have also been supporting LME metals as global markets increasingly price in a reflationary wave next year. This ties into market expectations for a weakening USD as the Biden administration is expected to see a return to traditional US foreign policy orthodoxy. This should decrease geopolitical uncertainty and ultimately translate to an appreciation in the yuan.” 

“A return decomposition in aluminium suggests that prices have rallied more than would otherwise be implied by the rise in broad commodity demand growth and a growing supply premium. In other words, idiosyncratic factors are contributing the premium in aluminium markets. While this premium has been correlated to speculative positioning, the evidence suggests that strengthening price momentum which cemented the rise in CTA positioning may have been driven by the stockpiling demand.”


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