Slow Demand Recovery May Weigh on Aluminium Prices, While Steep Falls Are Unlikely Either in 2022

SHANGHAI, Jun 1 (SMM) - SMM believes that the current domestic upstream smelters are less affected by the pandemic, and production resumption in the first quarter was more than expected. However, because of the slow recovery of downstream consumption, the overall aluminium prices are under pressure. Aluminium prices are likely to move between 19,000-20,500 yuan/mt in the near-term, and will be subject to supply and demand dynamics in the third and fourth quarters with an expected inventory accumulation, but are likely to fall significantly.

Aluminium, as an important variety of non-ferrous metals, could cast significant influence on the industry chain, hence is has been within the focus of industrial players, including production resumption. In 2021, the focus of domestic aluminium market was on production restrictions on the backdrop of carbon peaking and neutrality. After entering 2022, the production resumption in January-May has exceeded expectations set at the beginning of the year, with the progress mainly made in the first three months. According to SMM statistics, as of late May, the domestic operating aluminium capacity has exceeded 40 million mt, among which 2.5 million mt of capacity was resumed, equalling to the reduced capacity last year due to policy reasons.

As for the reasons for the resumption of production, SMM believes that there are several causes. Firstly, the power supply has been greatly improved this year, with hydropower supply in Yunnan increasing by 20% year-on-year. Secondly, as economic stabilisation undertakes the ultimate importance, the country has relaxed the overall regulation and control toward the entire industry. The third is that the profit situation of the aluminium smelters has picked despite some contractions owing to falling aluminium prices, the profit margins stays around 2,000 yuan/mt.

At the same time, the pandemic has had a greater impact on the industry chain both at home and abroad. With regard to the closure of the import window, SMM will explain the current import and export markets from two aspects.

On the one hand, the biggest unexpectedness that emerged in overseas markets during the January-May period was the Russian-Ukrainian war. Aluminium is most affected non-ferrous metal by the Russian-Ukrainian war. The overseas production cuts caused by the war were mainly found in Western European countries, with the total production cuts exceeding 900,000 mt, which led to a certain contraction in overseas supply. At the same time, the Russian-Ukrainian war significantly raised energy prices, thus casting a great impact on the production cost of aluminium. As such, domestic and foreign aluminium price trends began to diverge, with overseas prices rising faster than domestic ones, quickly narrowing SHFE-LME price spread.

On the other hand, falling SHFE/LME price ratio will hinder aluminium ingot imports. In 2021, due to higher domestic prices than overseas prices caused by production cuts in China, China imported 1.4 million mt of aluminium ingots, which partly relieved the domestic supply tightness. The situation is completely the opposite this year as overseas prices are higher than domestic ones, and the import window was closed since late November last year.

In addition to this, the market is also worried about whether there will be a massive influx of Russian aluminium into the country. But as of April, the import data shows that it does not happen.

Three significant changes have been discovered in terms of import and export on the backdrop of low SHFE/LME price ratio.

Firstly, there was a significant increase in the export of aluminium ingots, mainly happened in the bonded areas of Shanghai and Guangdong, where the export of aluminium ingots is still rising slowly. Secondly, the import of aluminium ingots decreased faster, down 77% YoY in April, and more than 70% in January-April. Finally, the exports of domestic aluminium semis increased significantly, which, as of April, exceeded 2 million mt.

SMM believes that the destocking dragged on by the pandemic will be realised in June. And in the case of repeating pandemic in east China, the pressure of domestic supply and demand still exists in the long term. The current contradiction of domestic aluminium prices mainly lies in the consumption side. With the spread of the pandemic in late March, the demand in major aluminium consuming areas such as Jiangsu, Zhejiang, Shanghai, Foshan, Guangdong, Shandong, and Henan was severely suppressed by the pandemic, while aluminium smelters located in south-west China and north-west China were less affected. The actual rose instead of falling. Therefore the scissors difference between supply and demand is more likely to appear.

As of May 26, domestic aluminium stocks stood at 936,000 mt. As the impact of the pandemic has not yet completely faded away, SMM believes that the current logistics and transportation situation is the most important measure to reflect whether the supply and demand situation is recovering. Although there is still 930,000 mt of visible inventory, the actual stocks will higher than this number as some goods are still in transit due to the pandemic.

It is worth noting that SMM believes that for future inventory projections, the biggest contradiction lies in the realisation of the scissor difference. According to SMM data, as of the end of May, domestic aluminium inventories have exceeded the level of the same period in 2020. Looking ahead to June, although the inventory may continue to drop, the actual decrease may be less than expected. Nonetheless, with the downstream actively resuming the production, the inventory is likely to stay around 0.9-1 million mt in the next 2-3 month, without palpable increases or declines in the total inventory. In the medium to long term, stock accumulation will occur in the third or fourth quarter.

For aluminium price forecast in the third and fourth quarters, SMM believes that aluminium prices will fluctuate following the supply and demand dynamics, but will not rise or drop steeply. Now China is actively regulating the market with positive readings concerning the macro economy, market players are now more optimistic about demand resilience. At the same time, frequent macro regulation in China will underpin aluminium prices although the overseas macro environment and geopolitical situation will weigh on the prices to some extent.

But ultimately, SMM thinks that the aluminium market is in the process of marginal weakening throughout 2022, meaning that aluminium prices will remain in the downward trajectory with fluctuations. The prices are likely to remain between 19,000-20,500 yuan/mt in the short term.