Detailed Analysis: Chinese Aluminium Market Shifting To Surplus And Macro Headwinds To Send Prices Into A Downturn In Second Quarter Or Half Of This Year

Aluminium prices have been trading at lows since July last year. As the market has the potential to shift to oversupply and faces macro headwinds, aluminium prices are at risk of entering a downturn in the second quarter or second half of this year.

Downstream operating rates were below same period last year in the first quarter. Demand was less strong than expected in the traditional peak season.

Despite improving home sales, the area of completed housing construction may decline due to drop in the area of housing under construction.

The performance of auto market was weaker than expected in the first quarter. With growing fears of economic recession in the US and Europe, China's auto exports may decline. As such, automobile production and sales may fall in the second quarter.

Aluminium semis exports also fell sharply on a year on year basis.

Operating rates of aluminium smelters in major production provinces - Shandong (100%), Xinjiang (99.35%) and Inner Mongolia (95.76%) were pretty high in March. The combined installed aluminium capacity in these three provinces are 20.65 million mt, nearly half of China's total.

As of April 20, 930,000 mt of aluminium capacity was resumed in China while 212,000 mt was newly commissioned. The two combined are 1.14 million mt, which could almost counteract the 1.2 million mt of aluminium capacity that was cut earlier.

Monthly aluminium production rose in the first quarter when compared with same period last year

With recent decline in input prices, smelters profits have improved. For example, profits of smelters in Shandong are around 2,000 yuan/mt.

Once the dry season is over and power supply shortages are resolved, smelters in Yunnan could resume production rapidly.

It is estimated that another 2.63 million mt of aluminium capacity will be resumed later this year and 1.57 million mt of new capacity may be put into operation. As a consequence, capacity will probably shift to excess in the second quarter or second half of this year weighing aluminium prices down.