SMM Daily Review - 2012/7/16 Aluminum Market

SHANGHAI, Jul. 17 (SMM) – SHFE aluminum for three month delivery started slightly higher at RMB 15,570/mt and closed up RMB 120/mt or 0.77% at RMB 15,605/mt on Monday, after finding its high at RMB 15,630/mt and low at RMB 15,555/mt. Strong resistance was met at the 30-day moving average. Positions dropped 1,326 lots to 108,278 lots as both longs and shorts chose to close their positions, which kept aluminum gains behind those of other base metals and led to relatively fragile support at the RMB 15,600/mt mark.

Spot aluminum traded at RMB 15,580-15,620/mt in Shanghai, with discounts of RMB 50-80/mt over current-month SHFE aluminum prices. Low-iron aluminum was sold at RMB 15,680-15,700/mt. SHFE aluminum prices climbed with other base metals prices but trimmed gains due to limited space above. Spot aluminum consumption was extremely weak. Spot discounts did not narrow even on the last trading day of the current-month contract. Middlemen were seeking deliverable goods to tap discounts but suppliers had kept prices firm, causing light trading to continue. Spot aluminum trading was extremely light in the afternoon as both sellers and buyers refrained from trading. Sparse quotations at RMB 15,580-15,600/mt were heard but deals were rarely concluded.

A recent SMM survey on 33 aluminum traders reveals that the average traded price of spot aluminum in Shanghai was RMB 15,572/mt last week, up RMB 92/mt from the previous week. 8 of the 33 traders expressed optimism towards this week’s aluminum prices, 12 are neutral while 13 hold bearish views. The proportions of bullish respondents increased to 24%, but bearish traders have a larger 39% share.

This week a total of 8 traders are bullish, accounting for 24% of total survey samples. According to these traders, although domestic aluminum consumption entered the soft season, but the recent two weeks’ performance indicates stability. Overall turnover fell noticeably from last year but aluminum prices were relative stable, only with short fluctuations after power rate cuts. Aluminum prices later rebounded to RMB 15,500/mt and smelters still face heavy losses. Stabilizing supply and demand will prevent aluminum prices from a sharp fall. On the macroeconomic side, real estate market sales recently warmed in some regions and confidence for a recovery in downstream has rebounded. China’s second-quarter GDP growth fell to 7.6%, in line with market expectations and demonstrating the real economy is clearly decelerating. China’s June CPI decreased to 2.2%, a 29-month low, which also creates conditions for easing of liquidity during later time. Domestic aluminum prices therefore are more likely to climb. Overseas, the European debt crisis still faces short-term uncertainty, Fed insists on “operation twist” rather than QE3, pushing the dollar above 83. LME aluminum prices have been relatively stable, holding near USD 1,900/mt. SHFE aluminum contracts for August delivery have now become current-month contracts and also have relatively strong support at RMB 15,600/mt. To sum up, these traders tend to bet on support from future monetary easing. They expect aluminum prices to climb further to RMB 15,600-15,700/mt.

12 traders accounting for 37% of total survey samples hold neutral views. These traders said aluminum prices have limited space to go down in the short term. They generally believe large aluminum producers such as Chalco and China Power Investment will become reluctant to sell at low prices to support existing aluminum prices. More aluminum plants running at loss will provide fundamental support. At this low demand season, they say aluminum prices now run at the bottom and further weakening needs to overcome stronger resistance. On the other hand, they are relatively cautious toward the current rise in aluminum prices, mainly due to staying weak consumption and inventory increases. In addition, European debt problems, the strengthen US dollar and low possibility for QE3, coupled with an evident domestic economic slowdown, will weigh on rebounded of aluminum prices. Above said, aluminum prices will continue to maintain a narrow range of RMB 15,500-15,600/mt in the short term.

The 13 (39%) bearish traders said that spot aluminum prices are still on the downward track. Firstly China’s economic slowdown is already shown in 2Q GDP data. The real economy will be not controlled by liquidity regulation at the moment. For overseas economies, demand from Europe is weakening, severely eroding production orders in China. The evident drop in operating rates in East China and South China businesses is hard evidence that the real economy is slowing. Facing sluggish demand, aluminum smelters have not cut output but restarted idled capacity instead, weighing on aluminum prices as supply increases while stocks stay high. Spot discounts even expanded to as much as RMB 90/mt. Technically, the SHFE medium-to-long moving averages are still heading lower, indicating aluminum prices are still pressured. The Bollinger Band shows the upward band is relatively stable while the average is still heading down. SHFE aluminum prices are still in the downward band, with low possibility for a rebound.