Fundamentals of the Rising LME Aluminium Prices

SHANGHAI, Mar 3 (SMM) - LME aluminium prices kept rising after Russia started a military operation against Ukraine. After LME aluminium rose nearly 5% yesterday to set a new record, it continued to rise in the overnight trading. However, the impact of the Russia-Ukraine conflict was far more than that. As the market worried about the interruption of the Russian natural gas supply, the prices of natural gas in Europe soared to an all-time high, which triggered further the market's concern about the reduction of the production of European aluminium plants again. Thus, LME aluminium prices skyrocketed. In early trading today, LME aluminium prices rose 2%, hitting a new historical record with $3,650/mt. As of 11:32, LME aluminium rose by 1.58% to $3625.5/mt.

SHFE aluminium futures soared in overnight trading along with the LME aluminium prices. In early trading today, SHFE aluminium futures kept the rising trend, with a strong increase of over 3%. By midday closing, SHFE aluminium futures prices stood at 23,680 yuan/mt, an increase of 3.29%. SHFE aluminium futures prices set a new record in several months, too.

The spot prices are basically the same as that of futures. On March 3, the SMMA00 aluminium prices were 23,540 yuan/mt, up by 690 yuan/mt compared with yesterday.

The price of natural gas in Europe reached a record high, and traders are worried that the escalation of the Russia-Ukraine conflict may lead to the interruption of the natural gas supply.

About one-third of natural gas in Europe is imported from Russia, and any interruption may keep the price high for a long time. Therefore, the natural gas supply will be a challenge for Europe this summer, and its energy shortage may last for quite a long time.

Domestic aluminium production resumed faster, while the output in the first quarter could hardly exceed the level of the same period last year.

As of February 22, Yunnan has released more than 600,000 mt of green secondary aluminium capacity. It is estimated that by the end of March, the capacity of green secondary aluminium projects in Yunnan will reach 4.3 million mt. Combined with the recent reduction of production in Guangxi, Shanxi and other places and the resumption of production in other areas, SMM estimates that by the end of the first quarter, resumed production and the new operation of aluminium in domestic will be 2 million mt. Thus, the domestic aluminium operation capacity will rise to around 39.6 million mt. However, it will take some time to achieve the designed output, and this part of output will be released in May and June. The output of aluminium in domestic in the first quarter will hardly exceed the level of the same period last year.

In overseas supply, with the rising energy and electricity prices in Europe, aluminium enterprises bore huge pressure and proceeded intensive reduction of production. According to SMM, by the end of February, the production capacity of aluminium in Europe decreased to 870,000 mt, pushing up the overseas aluminium prices. Under this background, the domestic aluminium import window remained closed. The import losses of aluminium per ton were as high as $3,000/mt, and it is almost impossible for overseas aluminium ingots to flow into the domestic market. In the first quarter of last year, the total import volume of aluminium reached 330,000 mt, and the total import volume for the whole year reached 1.5 million mt.

Holidays, environmental protection, high-priced raw materials, etc. slowed down downstream consumption of aluminium.

By the end of February, SMM social inventory of aluminium recorded 1.117 million mt, an increase of 391,000 mt compared with the end of January. In the seven weeks before and after the Spring Festival, domestic inventory of aluminium and aluminium billet increased by 468,000 mt, much less than the same period of previous years. Aluminium prices continued to run at a high level in March. Operating rates in some small and medium-sized enterprises will be restrained, and more orders directly from end users will return to large enterprises that maintain relatively good operating rates. In March, the real estate, construction, electric power and other sectors are expected to improve, which will further stimulate domestic consumption. The social inventory of aluminium ingots may begin destocking cycle in mid-March. The inventory will drop from the highest point of around 1.2 million mt to 1.1 million mt by the end of March.

Except for domestic aluminium consumption, there are still favourable expectations for exporting domestic aluminium semis overseas in the future. In 2021, the domestic aluminium semis export profit kept rising, and the total export volume reached 5.46 million mt, up 18% year-on-year. In 2022, SHFE/LME price ratio ran at a low level, and the aluminium exports gained good profits. According to SMM, at present, the profits of aluminium plate/sheet, strip and foil exports reaches $800/mt, setting a record high, which will stimulate domestic aluminium exports.

All in all, from the domestic fundamental point of view, the market is bearish because of the increment of domestic supply and the accumulated inventory of aluminium ingots. However, it is difficult for overseas aluminium ingots to flow into the domestic market, and there is a gap in the total domestic supply year on year. With the improvement of construction and end-user demand, aluminium ingots may quickly destock. Moreover, overseas macro uncertainty aggravates the worry of tight energy and aluminium supply. All the above-mentioned factors will keep aluminium prices at high levels in the short term. SHFE aluminium prices are expected to move between 22,000-24,000 yuan/mt, and spots are likely to trade at discounts.