SHANGHAI, Jun. 26 (SMM) – The October contract became the most active SHFE aluminum contract on Monday, starting lower at RMB 15,510/mt and settling down RMB 105/mt or 0.67% at RMB 15,515/mt, after finding its high at RMB 15,620/mt. Positions added 4,448 lots to 95,628 lots. SHFE aluminum stayed soft in the day as the Shanghai Composite Index stagnated and due to weak fundamentals. Cautious short-selling means it will continue testing RMB 15,500/mt, however.

Spot aluminum prices were between RMB 15,600-15,630/mt in Shanghai, and RMB 15,680-15,700/mt for low-iron aluminum. Spot aluminum prices dropped to RMB 15,600/mt as the current-month SHFE aluminum contract slipped. Large traders held back goods but SMEs were willing to sell. Deals were limited and mostly done near current-month SHFE aluminum prices as downstream continued to purchase on an as-needed basis. Quotations were sparse and at RMB 15,600-15,610/mt in the afternoon after SHFE aluminum prices slipped below RMB 15,600/mt. Deals were quite rare in the afternoon.

SMM statistics show the average traded price of spot aluminum in Shanghai was RMB 15,690/mt last week. SMM contacted 36 traders on this week’s aluminum prices, with no trader bullish, 8 neutral and 28 bearish.

The 8 traders holding neutral views say aluminum prices are already at their bottom and downside space has been limited.

On one hand, the recent drop in aluminum prices was mainly due to expectations of power rate cuts. However, there still have no official explanations for such policies, stirring doubts over support from such policies. Further more, aluminum producers are still operating at loss even at present prices, which will limit shipments of smelters. Traders with high stocks built earlier will also move aside, reducing supply and therefore supporting prices.

On the other, LME aluminum prices have slipped for 9 successive trading days, so a correction might show as prices fall to the bottom. Short-selling is also seen becoming cautious, e.g. transacted contracts dropped, after LME aluminum prices slipped sharply on Thursday and Friday. This will also curb losses in SHFE aluminum prices.

On the fundamentals side, domestic spot aluminum stocks are still falling, though in a slow pace, as smelters cut shipments. And stable downstream purchases will support present prices. These traders expect spot aluminum prices to move within RMB 15,600-15,650/mt this week.

The remaining 28 traders said aluminum prices will drop to RMB 15,500-15,550/mt.

According to these traders, shorts have been strong recently as proved by losses in both LME and SHFE aluminum prices. Though LME aluminum consolidated at the bottom on Monday, pressure from the news side was still strong as the European debt crisis remain unsolved and QE3 has been held back recently to push up the US dollar index and weigh on aluminum prices. Longs have been cautious. SHFE aluminum still faces short-selling pressure following a further contraction in the manufacturing sector, and therefore still has downside space. The moving averages also reveal the same trend. Forward contracts are still weaker than near-term contracts, indicating pessimism on future aluminum prices.

On the fundamentals side, an around RMB 1,400/mt drop in aluminum production cost has been produced by power rate subsidies (based on RMB 0.1/kwh), which will largely weaken support from production costs and induce expectations of lower prices. Meanwhile, as downstream sectors enter the low-demand season and supply continue to increase (some idled capacities are being resumed in Guangxi, Henan and other regions), aluminum prices will face even heavy pressure.