Aluminium Price Unlikely to Break out of the Range with Easing Supply Pressure as Well as Low Inventory and High Cost

SHANGHAI, Nov 11 (SMM) - The most-traded SHFE aluminium moved in a wide range in the period of October 14 - November 10, with its monthly low and high at 17,425 yuan/mt and 18,720 yuan/mt respectively. The contract closed the session at 18,590 yuan/mt as of November 10, down 240 yuan/mt or 1.27% compared with the previous session. LME 3M moved between $2,150-2,400/mt during the same period, and stood at $2,325/mt as of 15:00 on November 10 Beijing time, marking a monthly growth of 1.04%.

On the macro front, the US Chicago manufacturing PMI unexpectedly fell to 45.2 in October, hitting a new low since May 2020 and falling to the contraction zone. The eurozone's October harmonised CPI rose 10.7% year-on-year, beating market expectations and hitting a record high. Chinese official manufacturing PMI in October recorded 49.2, the non-manufacturing business activity index came in at 48.7, and the composite PMI output index was 49.0, all of which fell below the 50-point mark, indicating that the overall production and operation activities of Chinese enterprises slowed down. In early November, the US Federal Reserve (Fed) raised the interest rate by 75 basis points again, the sixth rate hike this year, and the fourth time in a row that the Fed hiked the rate by 75 basis points, with a cumulative increase of 375 basis points since entering 2022. The European Central Bank also raised interest rates sharply by 75 basis points for the second straight time.

On the fundamentals, the supply side saw slightly rising operating aluminium capacity in October. In detail, some smelters in Yunnan province expanded the production cuts early in the month, while the production recovery in Guangxi and Sichuan province was slow. The commissioning of new capacities in Guizhou and Inner Mongolia province also fell short of expectations. By the beginning of November, the domestic operating aluminium capacity had recovered to around 40.48 million mt. Domestic aluminium price was on the downward track, and about 30% of the operating capacity was at a loss in October. Also according to SMM statistics, the weighted full cost of domestic aluminium in October was about 17,595 yuan/mt, down 5.5% year-on-year. Among them, about 30.2% of the capacity in October was at a loss, which is mainly located in Shandong, Henan and Guangxi. Aluminium smelters with a cost of more than 18,000 yuan/mt accounted for 32.4% of the total capacity. At the beginning of November, smelters with higher cost in Shandong and Henan have plans to curtail the production, involving a combined capacity of nearly 190,000 mt. The import window of aluminium ingot was firmly closed. And the LME and the US market have not yet made a final decision on the ban on Russian aluminium. As such, the Chinese market did not see the significant inflow of aluminium ingot in October. On the demand side, the downstream operating rates fell again in October partly due to the week-long National Day holiday at the beginning of the month. In addition, the renewed pandemic post the holiday hindered the production of downstream enterprises in Henan and Shandong, and the industry demand declined as a result. Taken together, domestic apparent consumption still posted a year-on-year increase of about 5% in October. However, the pandemic outbreak across China in October resulted in the poor arrival of aluminium ingots in north-west China, which barely fulfilled the demand in major consuming areas. Instead, where the supply was tight and the inventory was low, the spot premiums embarked on a quick upward trend.

To sum up, in the session ranging November 11 - December 10, the production curtailment in Shandong and Henan where the production cost is high is expected to total 190,000 mt, while overseas capacity reductions have expanded to 2.15 million mt. The production recovery in places like Guangxi is slow amid high cost and low aluminium prices, while the tight power supply in south-west China will also weigh on the resumption of aluminium capacity. In other words, the pressure on the supply side will ease in China and abroad. On the demand side, downstream operating rates in the traditional seasonal high in October fell short of expectations. Nonetheless, the demand side will maintains some momentum with the fading of previous influencing factors as well as the boost from the policy end. In addition, short-term aluminium ingot social inventory is likely to remain low trailing the poor market arrivals at mainstream social warehouses in October. On the whole, the domestic aluminium market is filled with both longs and bears in November. High cost and low inventory is likely to offer strong support, while the upside room will be contained by the consumption side. The most-traded SHFE aluminium contract is expected to move between 17,600-19,300 yuan/mt and LME aluminium between $2,150-2,450/mt amid frequent disturbances on the supply side.