SMM Analysis: Alumina&Coal Price Support Weakens, Aluminium Price No Longer Keeping Firm?

SHANGHAI, Nov.20 (SMM)－Aluminium price has been surging this year. On one hand this is caused by supply-side reform and green policies. On the other hand, cost rise especially alumina and coal is the main factor supporting surging of aluminium price.

As per SMM data, average full cost of domestic refined aluminium enterprises in November 2017 is 16,033 yuan per tonne, up 4.5 on yearly basis. Hence, the rising cost is another main factor supports rise of aluminium price.

But since the highest point of 17,375 yuan on Sept 21^st, SHFE Aluminium has retraced for 14.8%. With the beginning of heating season, the price drops rather than rises. Market thinks on one hand the execution degree of production limit plan remains to be seen. On the other hand, effect of cost rising is weakened to support the price.

Alumina price begins to retrace

Alumina is the main metallic raw material for smelting. SMM Alumina Index has risen nearly 50% from the lowest level within this year. Alumina plants are more active to selling goods and traders are adjusting their prices but smelting plants still refuse to accept the offer.

Recently through communication with alumina and refined aluminium plants, SMM finds alumina price begins downward tendency. On Nov.15^th production limit plan begins to take effect for alumina and refined aluminium during heating season. Liu Xiaolei, SMM analyst says what needs to focus on is whether aluminium plants in Shandong, Henan and Shanxi will lower refined aluminium output quickly. If the speed of supply shrinkage is slower than consumption shrinkage, aluminium ingot inventory is very likely to accumulate after the Spring Festival (Up to Nov.20^th, SMM statistics shows total alumina ingot inventory in seven major consumption places reaches 1.762 million tonnes, setting new historic high), which may suppress the aluminium price.

As per latest news learned by SMM, the downward tendency of alumina is inevitable now. The first stage is to touch the position of 3,200 yuan per tonne, and then rebound as per production limit during heating season and newly-increased capacity of refined aluminium or drop directly to cost line after heating season ends. What need to mention is that above analysis is based on no great change of pricing mechanism of alumina and ratio of long-term orders. The negotiation on alumina long-term orders for next year is being proceeded. SMM will keep tracking.

Various factors lead to drop of coal price

Policies ensure stable coal price during heating season. With the upcoming peak season, the government has carried out market patrol on coal price, which suppresses speculative traders to raise price and shows attitude of government to stabilize the price. This adds downward pressure to coal price at current high level.

Advanced capacity can release in order and guarantee effective supply. As implementation of national supply guarantee policy, main producing areas of coal has recovering production gradually, with advanced capacity being released. Stocked coal at producing areas has increased, which suppresses the coal price, leading further drop of price at port.

Drop of coal price lowers cost of aluminium at the same time.

Yang Yang, vice manager of Shide Energy Group says, living electricity consumption accounts for a little portion in current life as the main consumption comes from industrial usage. Due to green policy, the total industrial electricity consumption will drop. Since current daily consumption moves between 600,000 tonnes, which shows cold weather make no difference, so green policy causes drop of electricity consumption of downstream end users. Current price is estimated to be a very good point of short-selling.

In summary, if alumina and coal price weakens, aluminium price is bound to be encumbered.

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