[SMM Review] Aluminium Prices Likely to Be Pressured in the Short Term

SHANGHAI, Feb 7 (SMM) - LME aluminium demonstrated a V-shaped chart during the Chinese New Year (CNY). Aluminium prices were suppressed by sluggish consumption in China and falling natural gas prices in the Europe. LME three-month aluminium closed at $3087/mt last Friday, up $27/mt or 0.88% on a weekly basis. LME aluminium ingot inventory stood at 775475 mt, which was the lowest since 2007, down 24,000 mt from the pre-CNY holiday level. Meanwhile, overseas natural gas prices still carry upside momentum, and the previously suspended capacity will be slow in recovery, underpinning LME aluminium.

Looking into this week, most aluminium smelters maintained normal operation during the CNY holiday. The sudden breakout of COVID-19 pandemic in Guangxi greatly impacted the regional logistics of materials. Meanwhile, the environmental protection policies in north China also restricted the production of some upstream anode and alumina refineries. As such, aluminium prices are likely to keep rising.

The downstream sector was mostly closed for CNY holiday, except for aluminium plate/sheet and foil companies that maintained moderate production. The operating rates of downstream processing companies dropped significantly on the whole. Furthermore, the resumption of production in Henan and Shandong is expected to be slow amid strict environmental protection measures.

The domestic aluminium ingot inventory rose more slowly than expected. As of January 27, domestic social aluminium ingot inventory stood at 726,000 mt, down 75,000 mt from the beginning of January. The inventory is likely to rise entering February, as the smelters increased the proportion of aluminium ingot in the product portfolio, and the downstream operating rates have been low. The total social inventory is likely to peak at 1.1 million mt in February, lower than in previous years.

On the whole, the short-term aluminium prices will be suppressed by the post-holiday accumulation of aluminium ingot inventory and slower-than-expected resumption of downstream production. However, in the mid to long term, the aluminium ingot inventory will drop quickly with the recovery of downstream demand. And the rising alumina prices on the cost side, as well as the tight supply of overseas aluminium smelters, will underpin aluminium prices.