SHANGHAI, Jan 19 - Since December 2021, the energy shortage problem in the Europe fermented. A number of overseas aluminium smelters introduced production cuts, triggering market concerns over primary aluminium supply around the globe. As such, LME aluminium surged, which pulled up SHFE aluminium, while the continuously falling China social inventory in the off-season also boosted the bullish sentiment.

The root cause for this energy crisis is that Russia has cut off the supply of natural gas to Europe by stating that it needs to actively stockpile natural gas to ensure its own heating demand due to the current cold weather. Hence, the amount of gas it delivers to Europe through the Yamal-Europe gas pipeline has been reduced to zero.

In essence, the disrupted supply is associated with the "Nord Stream 2" pipeline project. In other words, the geopolitics between the Europe and Russia has exacerbated the problem of energy shortage in Europe. According to SMM statistics, the current aluminium production capacity in Western Europe is about 5 million mt, accounting for 6% of the total global production capacity. And by the end of November 2021, the operating capacity in Western Europe stood at 3.26 million mt, with an average operating rate of 65.2%, a low point in the year.

At present, Europe's major aluminium smelters have reduce the production capacity has reached about by around 842,000 mt due to energy problems, accounting for 1.1% of the global aluminium capacity. If the issue of high electricity prices sustains, the global primary aluminium supply will face further contraction risks. Therefore, the market needs to continue to pay attention to the geopolitical issues between Russia and European countries and its impact on energy prices.

On the supply side in China, the production in Yunnan and Inner Mongolia is being recovered though slowly, with the production capacity in Yunnan being recovered by 300,000 mt. Meanwhile, with the recovery of smelting profits and marginal easing of dual carbon (carbon peaking and carbon neutrality) policies, the scope of the resumption of production has gradually expanded to Shanxi, Guangxi and other places.

As of early January 2022, domestic operating aluminium capacity stood at 37.7 million mt, and the installed capacity recorded 43.77 million mt, with an average operating rate of 86.1%. The operating capacity in January is expected to rise slightly.

On the demand side, the market believes that the demand will pick up after the Chinse New Year holiday in February. However, the current aluminium ingot and billet shipments continued to decline, while aluminium billet inventory kept rising, and the aluminium billet RCs pulled back down to a low of 180 yuan/mt. The overall domestic market showed marginal sufficiency in the supply side and weakening on the demand side.

Domestic social inventory of aluminium ingot has dropped from a high of over 1 million mt to 752,000 mt, and the decrease of inventory in the off season has topped market estimate, mainly because the arrivals dropped amid logistics disruptions caused by resurging COVID-19 pandemic. Nonetheless, the inventory is expected to see a pivot approaching the Chinese New Year.

Looking into the near future, the sustaining energy crisis in the Europe as well as the low inventory in China will underpin aluminium prices, but the price moves will still be restricted by the demand. The market shall closely watch the inventory changes and resumption of production in China.