The price arbitrage between three-month aluminum futures contracts on the Shanghai Futures Exchange and London Metal Exchange fell to a nine-month low of $149/mt on Wednesday, based on the daily closing prices from each exchange and prevailing exchange rates.
Since mid-November, the surcharge of the SHFE over LME has declined sharply after reaching a 2016 high of $363/mt. As of Wednesday, the SHFE premium against the LME was down 61% from that price.
Some of the narrowing between the prices on both exchanges has been a result of weaker yuan-denominated SHFE performance in December compared to dollar-denominated LME prices.
In the 30-day period starting November 14, three-month SHFE prices fell 9% and closed at Yuan 13,040/mt Wednesday. Over the same time period, three-month LME prices traded mostly flat.
Comparative weakness in SHFE prices has been particularly noticeable since the beginning of December, with each closing price trading below the 30-day moving average during every trading day since the beginning of the month.
Based on the 14-day RSI of the three-month SHFE, the relative price weakness has not been a result of particular overselling, with RSI trending within the 40-60 range since mid-November.
However, the price rise in mid-November, when the three-month contract rose to a 2016 high of Yuan 14,060/mt, coincided with a three-day period where the 14-day RSI remained above 70, a level indicating overbuying.
While the rapid climb of the SHFE in mid-November and the subsequent sell-off led in part to the reduction in the arbitrage between the two exchanges, much of the tightening came as a result of foreign exchange movements.
Since the SHFE's high in November, the yuan has depreciated by 1% against the dollar, with China's currency depreciating by 6% since the beginning of 2016.
Holding the yuan-dollar exchange rate at January's levels, the price arbitrage on Wednesday stood at $259/mt, around $100/mt higher than the difference between the exchanges in January. At this constant exchange rate, the current price differential also remains higher than the average across the third quarter of 2016.
