SMM Analysis on Why SHFE Aluminium Underperformed LME Aluminium amid Escalation of Geopolitical Conflict from the Perspective of Fundamentals

SHANGHAI, Mar 7 (MM) - The war between Russia and Ukraine escalated and western countries imposed greater sanctions on Russia, which triggered market concerns about the disruption of the global supply chain, causing energy and LME aluminium prices to soar, while SHFE aluminium fluctuated at highs. The most-traded SHFE aluminium contract opened at 22,370 yuan/mt last Monday, and jumped to 23,900 yuan/mt on Thursday amid growing Russia-Ukraine tensions, but pulled back subsequently due to the accelerated production resumption at domestic aluminium smelters and relatively weak downstream consumption. As of Friday afternoon, the most-traded SHFE aluminium contract closed at 23,570 yuan/mt, up 1,060 yuan/mt or 4.17% on the week. LME aluminium opened at $3,407/mt last week and hit a high of $3,850/mt before trading at $3,824.5/mt on Friday afternoon, up $444.5/mt or 13.15% on the week.

On the macro front, western countries stepped up sanctions against Russia. The United States, Britain and Europe sanctioned Putin, and some Russian banks were kicked out of the SWIFT. It was reported that the European Union would ban all transactions with Russia’s central bank. Aluminium-related companies, such as Alcoa and Hydro, have announced that they will stop trading with Russia. The transportation between Russia and Europe has been blocked. There were reports that the operator of the North Stream-2 pipeline project was mulling over applying for bankruptcy, sending crude oil and natural gas prices to a new record high.

From a fundamental point of view, the resumption of aluminium production in China accelerated. China’s daily average aluminium output is expected to rise to 104,000 mt in February. Driven by high profits, the domestic idled aluminium capacity is expected to return to production at a faster pace. The domestic operating aluminium capacity is likely to climb to around 39.6 million mt by the end of March. The operating rates of domestic aluminium processing enterprises picked up slightly last week. Some enterprises in Henan and Hebei increased their production with the relaxation of environmental protection policies, while high aluminium prices constrained the production of some enterprises. The social inventory of aluminium ingots in China continued to increase, but the growth slowed down. There were growing expectations that the destocking cycle will begin in the near future.

From a technical point of view, the most-traded SHFE aluminium contract may fluctuate at highs this week. The CRB weekly k-line rose as much as 9% last week due to supply chain concerns caused by geopolitical conflict. Onshore Chinese yuan depreciated last week, which is likely to boost the exports of aluminium semis. The random forest & time series model predicts that the price range of the most-traded SHFE aluminium contract will be [22875, 24085] this week, and the extreme price range will be [22535, 24140]. The LSTM & time series model predicts that the range of SMM A00 aluminium average price will be [22710, 24130] this week, and the extreme range will be [22350, 24160].

The futures technical indicators also signal that the most-traded SHFE aluminium contract may fluctuate at highs this week. Both the WR indicator and the CCI indicator showed signals of being overbought last week, hence the most-traded SHFE aluminium contract may move at highs this week. The MACD indicator showed a short red column at the close of last Friday, and the SAR indicator was still a red dot. It is expected that the most-traded SHFE aluminium contract will fluctuate between the middle and upper ends of the Bollinger Bands this week.

Aluminium smelters in Yunnan, Guangxi, Guizhou and other regions have resumed their production, and the domestic aluminium output is on the rise. However, the domestic aluminium output is expected to decline by 2.5% year-on-year in Q1. Due to stronger performance of LME aluminium than SHFE aluminium and high premiums overseas, the import window remains closed. The domestic aluminium supply declined from the same period last year. The accelerated production resumption and relatively weak consumption have postponed the arrival of the destocking cycle, which prevented SHFE aluminium from gaining as much as LME aluminium. In the short term, the increase in aluminium costs and decline in aluminium supply caused by the Russia-Ukraine conflict will underpin aluminium prices at highs. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 22,800-24,200 yuan/mt and $3,700-4,000/mt respectively this week.