SHANGHAI, Jun. 8 (SMM) - Aluminum inventories in China have dropped to nearly 1 million mt on stable downstream demand in seasonally peak demand period and stock building ahead of the Chinese Drag Boat Festival. A small number of aluminum producers have announced plans to cut capacity in response to the Chinese government’s requirement to tackle severe capacity in the aluminum sector. The Aluminum Corporation of China (Chalco) issued a statement on June 5, saying it had decided on a “flexible” production strategy, which involves a temporary shutdown of production capacity of approximately 380,000 mt of aluminum, taking effect immediately. Planned capacity cuts are limited, however, and without any details on actual production suspensions or halts, so it remains to be seen how much impact production cuts will have on aluminum markets. Aluminum prices over this past week did lead gains among base metals on falling inventories and production cuts.
SHFE 1309 aluminum contracts became the most active one early this week. Prices for the most active SHFE aluminum contracts encountered strong resistance at RMB 15,000/mt, with the high-end price at only RMB 14,975/mt as longs closed positions at highs, but did find strong support at RMB 14,900/mt on positive market fundamentals. SHFE aluminum for September delivery hovered near the 5-day moving average for the remainder of the week due to sluggishness in other base metals and as investors exited the market to avoid risks prior to the three-day Chinese holiday.
Mainstream traded prices of spot aluminum in Shanghai rose from last Friday’s RMB 14,720/mt to RMB 14,930/mt on Thursday, a gain of over RMB 200/mt. Guangdong also saw mainstream traded prices surge RMB 330/mt from last Friday to RMB 15,260/mt this Thursday. The more than RMB 300/mt in price gap between Guangdong and Shanghai enticed some traders to arbitrage between these two regions. Spot aluminum supply in south China remained tight, though, as seven days are needed to for delivery to the region and since demand for restocking was growing ahead of the three-day public holiday in China. Improving consumption and tight supply are the major reasons behind the significant uptick in aluminum prices. However, most traders are cautious about future prices as any change in inventories will have a direct effect on aluminum prices.
In the coming week, LME aluminum prices are expected to move within a USD 1,920-1,980/mt price range, with prices for the most active SHFE aluminum contracts testing support at RMB 14,900/mt. Mainstream traded prices for spot aluminum will remain firm at RMB 14,900/mt, with trading expected to be brisk.