SHANGHAI, Jul. 24 (SMM) – The most actively traded SHFE aluminum contract for October delivery gapped lower at RMB 15,500/mt and closed down RMB 270/mt or 1.73% at RMB 15,355/mt on Monday, as renewed worries towards the European debt crisis and sluggish domestic demand fueled short selling. Positions dropped 1,714 lots to 100,266 lots. Positions of SHFE aluminum for November delivery increased during the day, in preparation for a backward shift.

Spot aluminum traded at RMB 15,420-15,450/mt in Shanghai, at discounts of RMB 50-80/mt over current-month SHFE aluminum prices. Low-iron aluminum traded at RMB 15,520-15,540/mt. SHFE aluminum gapped lower and lost over 1%. The current-month contract lost support at RMB 15,500/mt, to the strength of shorts, with strong selling interest shown but purchases only being made on an as-needed basis by downstream and mostly at discounts of RMB 70-80/mt by middlemen. In the afternoon, HFE aluminum continued to weaken, with the current-month contract falling below RMB 15,400 for a short while. The wait-and-see sentiment was strong in the spot market, with sparse but firm quotations at RMB 15,420-15,430/mt being heard. Trading was light due to weak buying from both downstream and middlemen.

A recent SMM survey of 36 aluminum traders reveals that the average traded price of spot aluminum in Shanghai was RMB 15,578/mt last week, up RMB 6/mt from the previous week. The average spot discount dropped from RMB 56/mt to 51/mt. 8 of the 38 traders are neutral towards this week’s aluminum prices, with the remaining expressing bearish views due to sluggish sales and climbing stocks and after the over 1% loss of SHFE aluminum prices on Monday.

The 8 neutral traders said despite the drop on Monday, production losses at most Chinese aluminum smelters mean there is limited downside space. In addition, large aluminum businesses including Chalco and China Power Investment will cut supply to help aluminum prices recover. These traders expect aluminum prices to stay within RMB 15,480-15,580/mt this week.

The 28 bearish traders, which account for 78% of all respondents, said renewed focus on European debt means developments in Spain and Greece will continue to influence markets. The market response is even stronger this time, with the US dollar index being pushed above 83.8 as investors abandon the Euro and buy the US dollar. All base metals prices denominated in US dollar declined. LME base metals started to weaken from last Friday, with the trended being maintained on Monday when it fell to a fresh three-week low of USD 1,864/mt.

Following a plunge of LME aluminum prices on Friday, the most active SHFE aluminum contract for October delivery gapped lower and closed at a half-month low of RMB 15,355/mt. The current-month contract, though showed relatively stability, slipped to a two-week low of RMB 15,455/mt. SHFE aluminum prices face heavy downside pressure given weak support at moving averages below.

These traders also reported production output or even suspension downstream lacking production orders which kept purchases for spot aluminum low despite lower prices. In the meanwhile, aluminum production has been stable. That, combined with a declining demand drove up aluminum stocks by 9,000 mt to 694,000 mt on Monday in Wuxi, Shanghai and Nanhai. Spot aluminum prices fell as low as RMB 15,360/mt in Guangdong on Monday, while a lowest price of RMB 15,430/mt was reported in East China. High stock levels and slow sales mean East China aluminum prices will head toward the range in Guangdong. These traders expect aluminum prices to drop to RMB 15,350-15,450/mt this week.