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[agency Review] supply pressure rebounds under high profits and the room for aluminum price rebound may be limited.
Sep 15,2020 08:39CST
The content below was translated by Tencent automatically for reference.

SMM Network News: social inventory remains low, superimposed downstream peak season expectations still exist, the spot end is strong to support aluminum futures prices. With the marginal effect of monetary easing weakening in the world's major economies, fundamentals, the upward pressure on supply leads to increased willingness to sell insurance given that upstream smelting profits remain high. In view of the fact that there is no further significant positive in the short-term macro side, coupled with the gradual appearance of negative fundamentals or limit the room for further rebound of aluminum, aluminum prices are expected to have a higher probability of volatility.

The overall decline in global economic growth is a drag on terminal demand

The macro data of the world's major economies showed a sharp decline. Recent data released by the US Department of Commerce show that gross domestic product ((GDP)) fell at an annualised rate of 31.7% in the second quarter, the largest quarterly decline on record, reflecting the huge impact of the epidemic on the operation of the US economy. Personal consumption spending, which accounts for about 70% of the US economy, fell by 34.1% in the second quarter, of which spending on services, which was hardest hit by the epidemic, fell 43.1%, further supporting the fact that demand is weak. The US government continues to expand the deficit and the Federal Reserve continues to release liquidity to prop up the economy. The market expects the US federal budget deficit in fiscal year 2020 to reach $3.3 trillion, accounting for 16% of GDP, the highest since 1945. At the same time, after the Fed decided to keep the federal funds rate unchanged at 0-0.25% at its June meeting, the Fed recently announced an update to its long-term target and monetary policy strategy statement, which will seek to achieve the long-term target of 2% average inflation. It can be seen that the Fed tolerates the risk of excessive inflation data caused by monetary easing through average inflation rates. Judging from the performance of the commodity market, the marginal effect of the Fed's easing policy is weakening, the market speculative demand is declining, and the market focus is gradually shifting to physical terminal demand. It can be expected that the momentum of further higher commodity market prices is declining.

In the European Union, euro zone GDP fell 11.8% in the second quarter from the previous quarter, the largest economic decline since statistics were available in 1995. In Japan, real (GDP) fell 7.9% month-on-month in the second quarter of this year, at an annualised rate of 28.1%, the biggest drop since comparable data were available. Overall, the current macro data in Europe and Japan are more pessimistic, and the demand-side performance is still weak.

The domestic macro data are stable, and the GDP released by the Bureau of Statistics increased by 3.2% in the second quarter from negative to positive compared with the same period last year. The latest official PMI in August was 51.0%, down 0.1% from the previous month, but remained stable above the line of rise and fall. Among them, the index of new orders was 52.0%, up 0.3 percentage points from the previous month, rebounding for four consecutive months, indicating that demand in the manufacturing market continues to recover.

To sum up, the economic performance of other major economies except China is still weak in the short term, and we do not rule out the risk that sudden negative factors will lead to a double-dip in commodities.

Inventory remains low and downstream on-demand procurement is dominant.

Aluminum ingot inventory continued to decline, aluminum bar inventory inflection point. On September 10th, according to SMM statistics, the domestic social inventory of electrolytic aluminum (including SHFE warehouse receipts): 120000 tons in Shanghai, 24.9 tons in Wuxi, 87000 tons in Hangzhou, 87000 tons in Gongyi, 173000 tons in the South China Sea, 51000 tons in Tianjin, 5000 tons in Linyi, 3000 tons in Chongqing, and a total of 761000 tons of aluminum ingots in the consumption area. Weekly accumulation of 3000 tons to 764000 tons, since the beginning of August, domestic social inventory rebounded less than expected, the spot side is relatively strong to support aluminum futures prices. But the negative came from aluminum exports. According to the General Administration of Customs, China exported 395000 tons of unwrought aluminum and aluminum products in August, down 15.2 per cent from a year earlier and up 5.8 per cent from a month earlier. From January to August this year, China's cumulative exports of unwrought aluminum and aluminum products were 3.134 million tons, down 20.3 percent from the same period last year. In August 2019, China's exports of unwrought aluminum and aluminum products were 466000 tons, down 9.9% from the same period last year. Recently, from the feedback of downstream enterprises, the actual demand of the terminal is stable and weakening. with the rising aluminum prices, enterprises are more cautious in pricing, mainly on-demand procurement.

The profit of the smelting enterprise is high, and the pressure on the supply side is still there.

The supply side remained stable. According to the National Bureau of Statistics, the national output of electrolytic aluminum in July was 3.096 million tons, an increase of 3.10 percent over the same period last year, with a cumulative output of 21.134 million tons, an increase of 2.5 percent. At present, Shanxi first-class alumina is quoted at 2313 yuan / ton, Guiyang first-class alumina is quoted at 2350 yuan / ton, Henan first-class alumina is quoted at 2329 yuan / ton, and the price of alumina in the three places remains low. With the continuous rebound of domestic aluminum prices, the rapid repair of industry profits, the current average level has exceeded 2000 yuan / ton, high profits will stimulate the upstream to speed up the resumption of production. Recently, Yunnan Shenhuo completed the full operation of the first phase of the electrolytic aluminum project, involving an annual production capacity of 450000 tons, with an electrolytic aluminum output of 37500 tons in September, and the second phase of the project was completed at the end of September, involving an annual production capacity of 450000 tons, and the output will continue to increase in October. At the same time, Wenshan Aluminum Co., Ltd. has an annual output of 500000 tons of hydropower and aluminum project, and the third stage of the project has been electrified. The electrolysis production line is expected to be put into full production on September 14. It can be expected that after the fourth quarter, supply pressure will gradually increase, smelters and traders will continue to increase their willingness to sell insurance, and the room for a further rebound in aluminum prices will be limited.

To sum up, under the background that there is a certain recovery in the recent macro aspect, the superimposed industrial end shows a continuous state of going to the warehouse, and the aluminum market shows a strong operation. However, with the rising aluminum prices, we need to be wary of the supply-side rebound caused by the high profits of smelters, which may limit the room for aluminum prices to rebound further. It is expected that the operating range of the main aluminum contract from September to October is 13600-14800 yuan / ton, and upstream enterprises can consider selling a small amount to lock in profits in the range of 14500-14800 yuan / ton.

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