SHANGHAI, Apr 1 (SMM) - The domestic aluminium prices have come under downward pressure, and the future price trend will be significantly affected by the following factors.

Aluminium costs

Coal and other energies are subject to policy control, and hence are unlikely to soar. Alumina prices have lacked upward momentum recently and will face downside risks in the near term. As such, aluminium smelters’ costs will not see much change in the short term. The current profits of domestic aluminium smelters are as high as 4,500 yuan/mt, which will provide little cost support to aluminium prices.

Aluminium supply

The production of aluminium tends to be profit-driven. With the rise in profits, the operating rates of aluminium smelters picked up and the production resumption accelerated. According to SMM estimates, the operating aluminium capacity in China will rise from 38.38 million mt in January this year to over 40 million mt in May, and the average operating rate will climb to 92%. The operating aluminium capacity will remain high at around 41 million mt in H2. The domestic aluminium output is projected to increase 4.7% YoY to 40.3 million mt this year.  

The import window of aluminium has been basically closed since the beginning of this year. Based on the current aluminium prices, aluminium ingot importers will face a loss of 3,342 yuan/mt. The net import volume of aluminium ingots totalled 1.39 million mt in 2021, but was merely 27,000 mt in Q1 2022. The import window is unlikely to open in H1 as LME aluminium will continue to outperform its SHFE counterpart, thus the import volume will be limited.  

Aluminium demand

The pace of aluminium ingot destocking has slowed down as Jiangsu, Zhejiang and Shanghai, which are the consumption hubs, are hit by the pandemic. The operating rates of aluminium processing enterprises declined, especially in Shandong, where the operating rates slumped due to the pandemic.  Although aluminium prices have pulled back from highs recently, downstream demand remained under the influence of the pandemic, and this situation will extend into the near future.  

The large price difference between China and overseas created a profit of 806 yuan/mt for aluminium semis exporters, and the export profit of aluminium foil even reached 970 yuan/mt. However, the pandemic has disrupted aluminium semis exports.

Russia-Ukraine war:

Electricity prices in Europe are alarmingly high, and remain above 200 euros/MWh in France and Germany. Natural gas prices in Europe continued to rise. The energy crisis in Europe will intensify as Russia requires Europe to settle natural gas with rubles. As aluminium smelting requires a tremendous amount of energy, LME aluminium price is expected to remain high.

Rusal has repeatedly negotiated without substantial progress. The UK and the US may escalate their sanctions against Rusal. Although the conflict between Russia and Ukraine has significantly pushed up LME aluminium prices, Rusal’s aluminium ingots, which are not allowed to be shipped to Europe, are likely to flow into China, which may alleviate previous market concerns that China will be short of 1.3 million mt of imported aluminium ingots this year.

SHFE aluminium will continue to underperform LME aluminium. High aluminium prices and the spreading pandemic have significantly suppressed downstream demand. The market will see concentrated arrivals of aluminium ingots after the pandemic eases, while the demand in mainstream consumption areas has weakened. This may lead to an increase in aluminium inventory and put downward pressure on aluminium prices.  SHFE aluminium is expected to move between 22,300-23,200 yuan/mt in the short term. The ongoing overseas energy crisis will support LME aluminium at highs of $3,500-3,600/mt.