Aluminium Prices Supported by Potential Production Cuts and Rising Cost

SHANGHAI, Sep 20 (SMM) - Though the rumoured production cuts on aluminium production in Yunnan province is casting a greater impact on the supply side, the actual scale of production restrictions is still undetermined, while the demand side has not shown signs of improvement either. The most-traded aluminium contract kept falling yesterday September 19, closing the day session with a loss of 1.14% at 18,710 yuan/mt.

At present, news of production cuts as a result of power rationing in Yunnan has fermented with a 10% reduction nailed in the first stage, while it is rumoured that the production curtailment could expand in the future. Nonetheless, the follow-up decisions have not been heard yet, while the sentiment experienced greater shock.

Meanwhile, the pandemic situation in Sichuan province has eased, and closed smelters are resuming the production in an orderly manner. According to SMM research, Sichuan Qixingxing Aluminium Plant started to resume the production on September 5, and is planned to power on by September 20, with the production fully resumed by November 5. Resuming production in Sichuan slightly weighed on aluminium prices, but the pressure is insignificant in light of the slow progress in production resumption.

Though the supply pressure is not great, the demand side is sluggish as well. Real estate housing completions rebounded in August, but the overall performance is still muted. The average weekly operating rate of top-tier downstream fabricators rose merely 0.4 percentage point from a week ago to 66.4% as of September 15.  The traditional seasonal high expected in September and October is yet to pay off.

In addition, domestic aluminium ingot inventory has remained low. According to SMM statistics, as of September 19, the domestic social inventory of aluminium was 685,000 mt, an increase of 10,000 mt from the previous Thursday and a decrease of 11,000 mt from the first trading day post the Mid-Autumn Festival. The reading recorded a loss of 104,000 mt from the same period last year, but a gain of 8,000 mt compared with the end of August. The overall inventory has remained low at around 680,000 mt.

The spot price of SMM A00 aluminium ingot stood at 18,750-18,790 yuan/mt as of September 19, with an average of 18,770 yuan/mt, down 100 yuan/mt from the previous Monday.

Transactions in the spot market weakened. SMM aluminium price in Foshan showed a discount of 50 yuan/mt over the SHFE 2210 contract, and the average spot price recorded 18,770 yuan/mt, down 100 yuan/mt from the previous trading day. The spread between prices in Guangdong and Shanghai narrowed to 0 yuan/mt. In the second trading session, the cargo holders were more active in selling as aluminium futures prices fell, and the spot discounts expanded. The traded prices were in premiums of (100) - 50 yuan/mt over SMM aluminium price in Foshan, or in the range of 18,650-18,780 yuan/mt.

Though both futures and spot prices fell and cost support still existed. 

Also according to SMM, the weighted full average cost of domestic aluminium in August was about 17,576 yuan/mt, up 228 yuan/mt MoM due to rising electricity cost.

In general, aluminium prices are still supported by the expected production cuts and rising cost, and will edge higher if the demand picks up. However, it is necessary to stay alert to the macro risks brought about by overseas interest rate hikes.