SMM Sees Little Upward Momentum for Aluminium Prices in May amid Extended Regional Imbalance

SHANGHAI, May 5 (SMM) - The most-traded SHFE aluminium contract repeatedly slumped in April, closing the month at 20,890 yuan/mt, a drop of 1,840 yuan/mt or 8.1% from March. SMM spot A00 aluminium prices  averaged 21,935.8 yuan/mt in April, down 3.1% MoM. LME aluminium fell below $2,900/mt during the Labour Day holiday, while the SHFE market was closed from May 1 to May 4 for the holiday.

Domestic supply: The resumption of closed aluminium capacity and release of new aluminium capacity accelerated in Q1. According to preliminary estimates by SMM, the domestic operating aluminium capacity rose 220,000 mt MoM to 40.19 million mt at the end of April, and domestic aluminium output is estimated at 3.31 million mt in April, up 1.8% YoY, the first positive YoY growth this year. With the continued capacity release in Yunnan, Guangxi, Gansu and Qinghai, etc, the domestic operating aluminium capacity may hit a new high of 40.45 million mt by the end of May.

Imports: Aluminium ingots imports decreased significantly this year as LME aluminium outperformed SHFE aluminium. Customs data showed that the net imports slumped 92.9% YoY to 23,400 mt in Q1. In April, the import window of aluminium ingots was still not opened. This, coupled with the pandemic in Shanghai, lowered the efficiency of customs clearance. It is expected that domestic aluminium ingots still maintained a net export situation in April, and the exports were mainly driven by cargoes stored in the bonded area. Despite import losses, there were still certain amounts of Russian aluminium ingots in the market. It is expected that Rusal will be China's main source of aluminium ingot imports in 2022. China imported 60,500 mt of aluminium ingots from Russian Federation in the first quarter, down 28.8% year-on-year, accounting for 62.6% of total imports.

Domestic demand: In April, the operating rates of domestic aluminium downstream enterprises were lower than expected. According to SMM data, the PMI of the domestic aluminium processing industry in April was 35.7%, down 13.4 percentage points from the previous month. Among them, aluminium foil and primary aluminium alloy sectors saw a sharp drop in the operating rates when compared to March. Transportation issues sent the finished product inventory index up to 85%, which brought greater financial pressure to downstream enterprises. Due to sluggish auto and real estate markets, new orders in construction aluminium extrusion and aluminium alloy sectors fell sharply. Entering May, downstream operating rates were still constrained by the holiday factor and logistics issues caused by the pandemic. Although some auto makers have resumed work and production, it takes time to digest finished product inventory.

Inventory: Aluminium ingot social inventory rose slightly in early April as the pandemic affected downstream production and procurement, but entered destocking cycle in late April as shipments from smelters were disrupted by the pandemic. As of the end of April, aluminium ingot social inventory stood at 987,000 mt, down 67,000 mt from the beginning of the month. Inventory rose after the Labour Day holiday due to concentrated arrivals during the holiday, but may fall in the future when downstream buyers begin to restock, and are estimated at around 900,000 mt by the end of May.

Regional supply-demand imbalance caused by the pandemic may extend into May. US interest rate hike will intensify bearish sentiment. As such, aluminium prices will remain under pressure in May. The market shall closely watch how the downstream consumption recovery and overseas energy prices will affect aluminium prices. SHFE aluminium is likely to move between 19,000-22,500 yuan/mt in May.