Low Inventory Will Continue to Support Aluminium Prices at Highs

SHANGHAI, Mar 21 (SMM) - The most-traded SHFE 2005 aluminium contract showed a v-shaped chart last week, opening at 21,880 yuan/mt on Monday, with the lowest and highest prices at 21,235 yuan/mt and 22,880 yuan/mt respectively before closing at 22,830 yuan/mt on Friday afternoon, up 795 yuan/mt or 3.61% on the week. LME aluminium opened at $3,497/mt last Monday and hit a low of $3,219.5/mt before trading at $3,445.5/mt as of CST 15 on Friday, down $54/mt or 1.5% on the week.

On the macro front, the US Federal Reserve decided to raise the target range of the federal funds rate by 25 basis points at its second interest rate meeting of the year on March 16, which is the first interest rate hike since the start of the interest rate cut cycle in July 2019. As the pace of medium and long-term interest rate hike is hawkish, the US stock market collapsed after the policy meeting while the US dollar index rose rapidly, weighing on base metals. On March 15, the National Bureau of Statistics released the Chinese economic data for January-February 2022, which topped market expectations and pointed to strong supply and demand. The investment picked up significantly, and the domestic demand recovered faster than expected.

From a fundamentals point of view, the operating aluminium capacity in China increased slightly due to production resumption in Yunnan and other regions, but the total output was still lower than in the same period last year. The COVID-19 in China spread on a wide scale and fast speed, causing disruptions to the domestic transportation. The pandemic has not yet triggered output reduction or suspension at the domestic aluminium smelters, but severely hindered the transportation of upstream and downstream enterprises, reducing arrivals across the consumption hubs. Aluminium consumption in the major markets remained stable, and the operating rates of aluminium extrusion, plate/sheet, strip and foil sectors continued to recover. However, the pandemic-induced logistics issues could potentially hurt the consumption. The sharp decline in aluminium prices attracted downstream buyers in the first half of the week, allowing the domestic aluminium ingot social inventory to enter the destocking cycle.

From a technical point of view, the most-traded SHFE aluminium contract may experience a slight correction before climbing again this week. The weekly CRB commodity index rebounded last week. The 5-day moving average of the SMMI climbed above the 10-day moving average last Monday, which is seen as a bullish sign for the SMMI this week. The bearish sentiment triggered by the US Fed’s interest rate hike has been digested by more than half, and the aluminium ingot social inventory in China fell rapidly, which may lift the spot aluminium prices this week, However, there is a high probability of a downward correction for the most-traded SHFE aluminium contract following three or five consecutive days of gains. The random forest & time series model predicts that the price range of the most-traded SHFE aluminium contract will be [21720, 22950] this week, and the extreme price range will be [21405, 23655]. The LSTM & time series model predicts that the range of SMM A00 aluminium average price will be [21780, 23300] this week, and the extreme range will be [21440, 23360].

The futures technical indicators suggest that the most-traded SHFE aluminium contract may fluctuate at highs this week. Based on the 4-hour K-line, SMM observed a total of 40 technical indicators, of which 16 were neutral, 18 were bullish, and 6 were bearish. Overall, the most-traded SHFE aluminium contract is likely build upward momentum this week. The MACD, DDI and DMA completed the golden cross last week; the LON long-term indicator also broke through the LONGMA.

As the US Fed's interest rate hike is in line with market expectations, market risk appetite is expected to pick up. So far, the outbreak of the pandemic has had limited impact on the production of producers in the domestic aluminium industry chain. The domestic aluminium ingot social inventory may continue to decline as slower transportation due to the pandemic will affect arrivals. Low aluminium inventories in China and overseas will support aluminium prices at highs in the short term. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 21,800-23,500 yuan/mt and $3,350-3,600/mt respectively this week.