SHANGHAI, Jul. 3 (SMM) – Investor optimism from the late EU Summit deal quickly faded as manufacturing data contracted in both China and Europe due to the European debt crisis. The market focus has now shifted to Friday’s US non-farm payroll data for June. The weakening euro had helped the US dollar strengthening. LME aluminum slipped below and returned above the USD 1,900/mt mark, albeit support at the level has been weak and resistance at the 20-day moving average has been strong. It should stay within a narrow band for the near term and is not likely to break through USD 1,920/mt. Latest LME aluminum stocks were down 11,275 mt at 4,822,650 mt.
The most active SHFE aluminum contract for October delivery started higher at RMB 15,550/mt on Monday boosted by LME aluminum’s the strong performance Friday. Profit-taking by longs, however, dragged it to close lower at RMB 15,440/mt, up RMB 110/mt or 0.72%. Positions dropped 3,004 lots to 116,322 lots. SMM expects the contract to struggle near RMB 15,500/mt for the near term amid contracting Chinese manufacturing data, weak fundamentals and a lack of concrete measures for the EU Summit deal to help contain the region’s debt crisis.
Spot aluminum traded at RMB 15,540-15,570/mt in Shanghai, with low-iron aluminum trading at RMB 15,650-15,660/mt. SHFE aluminum’s fall following a higher opening price did little to boost confidence in spot aluminum. Mainstream traded prices dropped rapidly as buying remained weak in early July while supply has been ample. Quotations were sparse and at RMB 15,520-15,530/mt in the afternoon as the current-month SHFE aluminum contract continued to trim gains. Deals were hardly concluded in the afternoon as buying almost froze among both downstream and middlemen.
A recent SMM survey on 35 aluminum traders reveals that the average traded price of spot aluminum in Shanghai was RMB 15,480/mt last week. 6 of the 35 traders expressed optimism towards this week’s aluminum prices, 16 are neutral while 13 hold bearish views. The proportions of both bullish and bearish respondents increased in the survey.
The 16 traders expecting stable aluminum prices for this week have forecast a trading band of RMB 15,550-15,650/mt, which is based on an assumed balance between support from the late EU Summit deal, which pushed LME aluminum to as high as USD 1,920/mt on Friday, and pressure from disappointing June PMI data from China and Spain stirring worries that a sluggish real economy will continue to drag down metals prices.
SHFE aluminum dipped below RMB 15,000/mt last week, but also recovered fully as Chalco and Chin Power Investment bought to stabilize prices. A higher opening was also seen on Monday, but gains were trimmed due to weak market confidence, with the mainstream traded prices falling below the 10-day moving average.
Lower production costs after introduction of lower power rates for aluminum smelters in Henan, Guangxi, Guizhou, and other regions, are the major cause of the sharp drop in spot aluminum prices, while increasing supply from resuming idled capacity also weighs in a period of sluggish demand. Higher SHFE aluminum prices boosted performance of spot aluminum, but not much, as downstream continues to purchase on an as-needed basis, with spot discounts expanding to RMB 50/mt. Above said, aluminum prices are subject to limited capital input due to uncertainty from macroeconomic news, but will also be supported by large smelters’ efforts to stabilize prices.
The 6 bullish traders sees more support from the late EU Summit deal, adding that SHFE aluminum had been oversold recently amid introduction of lower power rates for aluminum smelters, and that stable consumer goods prices and gradually easing credit supply will help contribute a narrow rebound. Large traders’ low selling interest at low prices will also provide support. While downstream demand is gradually cooling, rigid demand exists, so aluminum prices are expected climb slightly to RMB 15,650-15,700/mt for the near term, according to these traders.
The 13 bearish traders said slightly negative macro economic news remain the dominant factor, as the late EU Summit won’t be able to solve the region’s debt crisis all at once and due to weak performance of euro zone economies. Spain already reported a contracting manufacturing industry and pessimism for other euro zone economic data has become mainstream. In addition, debt woes in Italy, Spain, Greece and Cyprus will continue to drive risk aversion to help the US dollar index stay above 81, thereby weighing on metals prices. Those traders also believe that the introduction of lower power rates for aluminum smelters, together with falling alumina prices, have greatly weakened support from production costs, and will at least prevent any output cut at smelters though the low-demand season has begun. The supply glut consequently will drag aluminum prices below RMB 15,500/mt.