SMM Analysis: How Will Surging Aluminum Prices Affect Downstream Producers?

SHANGHAI, Aug. 9 (SMM) – SMM A00 aluminum ingot prices gained 1,440 yuan/tonne in recent 30 trading days and gained 710 yuan/tonne over the past two trading days alone. 

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How much impact will the surging prices have on downstream producers? 

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For producers of aluminum flat rolled product (FRP), namely plate/sheet, strip and foil, they settle prices based on “aluminum ingot prices + processing fees”. Aluminum ingot prices come in many ways, i.e. prices on the day contracts are signed, prices on the day shipments are made, the average price during the five days prior to shipments, weighted average price of SHFE front-month aluminum contract. So, changes in aluminum prices have different impacts on producers with different settlement ways. For example, most producers in Henan settle based on aluminum ingot prices on the day contracts are signed. Their downstream clients usually buy actively when aluminum prices keep rising, but show low buying interest when aluminum prices fall steadily. For Chalco’s subsidiary companies and some SOEs, they mostly settle based on monthly weighted average price of SHFE front-month aluminum contract. The surge in aluminum prices incurred losses on FRP producers that settle based on monthly weighted average price of SHFE front-month aluminum contract, but they could negotiate with buyers to bear the losses together. In case of big rise in aluminum prices, FRP producers usually step up production and reject some orders, while end-users show lower buying interest.   

For aluminum extrusion producers, they generally settle by using aluminum ingot prices on the day orders are placed or one day before orders are placed as benchmark. The jump in aluminum prices triggered wait-and-see sentiment among downstream buyers. Many small door and window producers in Shandong shut down recently due to stringent environmental checks, further reducing orders at extrusion producers. July-August is the traditional off-season. So, orders are poor at extrusion producers. 

After aluminum prices’ plunge in 2015 and big volatility in 2016, most aluminum processors have reduced raw material stocks to 3-7 days and make purchases based on next month’s production plans. As such, this round of big gains in aluminum prices had little impact on processors’ raw material stocks. 

To sum up, the significant rise in aluminum prices has hurt consumption to some extent. 

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