Aluminium Price Volatility to Intensify amid Bearish Macro Environment against Bullish Fundamentals

SHANGHAI, Sep 19 (SMM) -  The most-traded SHFE 2210 aluminium contract opened at 18,900 yuan/mt last Monday, with its weekly low and high at 18,420 yuan/mt and 19,100 yuan/mt respectively before closing at 18,735 yuan/mt on Friday afternoon, down 230 yuan/mt or 1.21% on the week. LME aluminium opened at $2,289.5/mt last Monday, with its weekly low and high at $2,243.5/mt and $2,344/mt respectively before trading at $2,278.5/mt as of CST 15 on Friday, up $35/mt or 1.56% on the week.

On the macro front, the US CPI rose 8.3% year-on-year in August, exceeding expectations for 8.1%. According to CME's Fed Watch Tool, the probability of the Fed raising interest rates by 75 basis points in September was 67%, and the odds of a 100 basis point hike were 33%. The exchange rate of the offshore RMB against the US dollar reached above 7, hitting a new low since August 2020. The executive meeting of the State Council decided to extend the period of deferred tax payment for the manufacturing industry by another 4 months, involving 440 billion yuan of deferred tax. Starting from September 15, a number of large state-owned banks have adjusted the interest rates of personal demand deposits and time deposits to varying degrees. 

Fundamentals: Yunnan required local aluminium smelters to reduce their production by 10%, which is currently under way. As the power supply tends to tighten further, the output cuts could potentially expand to 20%. The installed and operating aluminium capacity in Yunnan stood at 5.61 million mt and 5.22 million mt respectively in August. The province’s aluminium output was 442,000 mt last month, accounting for 12.7% of China’s total output. Smelters in Sichuan are now resuming their production, but the output release has been slow. The operating aluminium capacity in China has declined to 40.5 million mt due to the reduction in Yunnan. The operating rates of domestic aluminium downstream processing enterprises were largely stable, except for disruptions by the pandemic in some areas. The end demand is expected to improve, driven by the stimulus policies in the domestic real estate industry. High aluminium prices inhibited downstream procurement, causing the social inventory to rise slightly.

Expectations for US interest rate hike will pressure LME aluminium, while domestic stimulus policies will benefit SHFE aluminium. The production cuts, high costs, optimism over future consumption, as well as the low aluminium inventories, will boost the aluminium market. In the short term, aluminium prices may fall back if the output reduction in Yunnan is smaller than expected. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 18,300-19,300 yuan/mt and $2,230-2,480/mt respectively this week. The market will closely watch the Fed's interest rate meeting on September 21-22.