Aluminium Futures Prices Were Driven up by Stronger Expectations of Overseas Production Cuts

SHANGHAI, Mar 15 (SMM) - The most-traded SHFE aluminium contract fluctuated fiercely from February 15 to March 10 due to the unstable geopolitics. Before March 7, the speculation boosted the market expectations for overseas aluminium production cuts due to the Russian-Ukrainian war, and the overseas energy prices soared. The LME and SHFE aluminium prices frequently hit new highs. SHFE aluminium reached 24,255 yuan/mt on March 7, and LME aluminium hit $4,073.5/mt. Then the longs withdrew their funds quickly, and the aluminium futures prices kept falling. SHFE aluminium closed at 21,735 yuan/mt as of March 10, down 1,555 yuan/mt or 6.68% on the month. Three-month LME aluminium moved between $3,170-4,073/mt during from February 15 to March 10, and traded at $3,380/mt in the afternoon of March 10, up or 4.7% on the month.

From a macro perspective, the war between Russia and Ukraine escalated, driving up the overseas energy prices sharply. Society for Worldwide Interbank Financial Telecommunications (SWIFT) plans to ban VTB and other six Russian banks from using the system. The Fed Chairman Powell reiterated that interest hikes are expected to start in March, and the continuously rising prices of commodities have further pushed up inflation risks, which may urge the Fed to tighten the monetary policy.

As for domestic fundamentals, the resumption of domestic aluminium production has accelerated since February, and the operating capacity of aluminium in Yunnan and Guangxi has continued to increase. The domestic average daily output of aluminium increased by 1,900 mt MoM to 105,000 mt in February. As of early March, the domestic operating capacity increased by 590,000 mt MoM to around 38.97 million mt. The aluminium output in April is expected to be flat on the year. The downstream consumption recovered slowly in February. Some downstream processing plants restricted the production due to the Beijing Winter Olympics and the strict heating policy. The domestic aluminium prices stood high in February, which resulted in lower downstream operating rates compared with last year. The domestic aluminium supply remained in surplus. As of March 10, the social inventory of aluminium registered 1.14 million mt, up around 350,000 mt from the beginning of February. The consumption recovered amid falling aluminium prices recently, and the aluminium ingot inventory declined more rapidly. The supply surplus is likely to turn to deficit.

From a technical point of view, the most-traded SHFE aluminium contract is likely to pull back in March. The impulse indicator that leads aluminium prices by seven months trended downward from March to April. If the USDCNY breaks through the MA10 moving average, and if the LME market continues to be upset by high prices, the SHFE/LME aluminium price ratio is likely to bottom out, and the LME aluminium prices may push up the SHFE prices. According to historical data, USDCNY has a strong positive correlation with the SHFE/LME aluminium price ratio. USDCNY bottomed at 6.30 and rebounded to around 6.32 on February 28.

The random forest & time series model predicts the most-traded SHFE aluminium contract to move between 20,650-22,415 yuan/mt in March, and 19,930-23,510 yuan/mt in extreme case. The time series model predicts that the average prices of SMM A00 aluminium will be 20,660-22,410 yuan/mt in March, and 19,940-23,490 yuan/mt in extreme case. Judging from the technical indicators, the prices of the most traded SHFE aluminium contract are expected to fluctuate at low levels. According to the monthly K-line of SHFE aluminium, the RSI1 indicator falls below the RSI2 indicator, and the CCI indicator shows a strong overbought signal. The monthly K-line from March to April is expected to move downward. However, since the SAR indicator turns from green to red, the SHFE aluminium prices are expected to move close to the low of Bollinger band and gain support.

The domestic aluminium supply will continue to increase, and the social inventory will keep rising from March 11 to April 10, which will weigh on the prices. However, the domestic supply still stands lower from the same period in 2021, as the overseas resources can hardly flow into China. The domestic aluminium supply may turn to deficit quite soon, because the downstream demand is recovering, and the exports of aluminium semis are expected to increase. Besides, the unstable overseas macroeconomics will intensify the concerns of energy and aluminium shortage. The aluminium prices are expected to fluctuate within a wide range in the short term. The most-traded SHFE aluminium contract is expected to move between 20,000-23,000 yuan/mt in March.