SHANGHAI, Jul 5 (SMM) - The Federal Reserve and other central banks raised interest rates one after another entering June, and the risk of economic recession intensified, weighing on commodities. Non-ferrous metals prices are also on the downward trajectory, and aluminum market supply and demand as well as the price direction has become the focus of market attention.

SMM believes that the commodity market is negatively affected by pessimism over the economic development as the overseas macro economy has performed poorly. The current concern for non-ferrous metals has shifted from the raw material side and the supply side to the consumption side. Real estate and automobile industries, as the two major terminal sectors of aluminum consumption, are expected to remain weak overseas in the long run. The domestic automobile industry and infrastructure sectors will probably be able to promote the demand for non-ferrous metals in the second half of the year. However, in terms of supply and demand, the overseas market, due to the impact of energy shortage, is challenged by supply risk in the second half of the year, while the domestic market, with the accelerated capacity commissioning, will see accumulating stocks during this period.

Non-ferrous metals are still pessimistic with pressure from the macro front

At present, with the rising inflation in Europe and the United States, the Federal Reserve as well as the eurozone, the Bank of England have been raising the interest rate frequently. In June, the Federal Reserve’s rate hike by 75 basis points had a certain impact on the entire non-ferrous metals market. At the same time, the European Central Bank has made it clear that it will raise the rates in July, and the UK is also in the process of raising interest rates.

It is worth noting that the OECD updated its forecasts for inflation data in June, which turned out to be a significant increase, with expectations of growing economic inflation. Some are predicting signs of recession by next year at the latest. Therefore, the market is expecting very poor economic performance at the moment, which is also a bearish factor to the commodities market recently.

However, based on the PMI data of various countries, the United States, Japan, the eurozone, the United Kingdom will produce a reading of above 50, indicating expansion in the manufacturing sector. Although the economy is expected to be poor, the current economic situation is relatively good, so the central banks also have the capability to curb inflation by raising interest rates.

Against this backdrop, the overseas automotive and real estate sectors have also performed poorly

The overall production of automobiles in Europe and the US in 2022 is on a downward trend compared with last year, mainly due to the shortage of auto parts and chips. At the same time, the increase in raw material prices has also prompted car manufacturers to raise their selling prices, and higher interest rates on loans as the result of interest rate hikes have also had an impact on the automotive industry. In the long run, people are more worried about whether the overall sales of the automobile industry can maintain its momentum.

In real estate, with the progress of interest rate hikes and higher raw material prices, new housing starts in the US fell, mainly due to higher mortgage rates, which had an immediate impact on real estate. The eurozone is equally unpromising. And low consumer confidence as well as fears of a recession will continue to affect spending power in the long run. The OECD has revised its GDP growth forecasts for major countries down sharply for 2022.

Therefore, the market players have paid more attention to the consumption side instead of raw materials and market supply when it comes to commodities and non-ferrous metals, which has also resulted in poorer expectations for consumption and falling prices. It is generally believed that non-ferrous metals will remain under pressure for the rest of this year and the next year with poor expectations for the macro economy.

Domestic exports of aluminium products are under pressure, with cars and infrastructure still the stars on the consumption side

The impact of the COVID-19 pandemic on Chinese economic development has been more pronounced. But after the pandemic situation improves, the domestic economy is expected to improve in the second half of this year.

In terms of export, China's exports in May reached more than 670,000 mt, an increase of 54% YoY and a record high. China's exports are mainly aluminum plate/sheet and aluminum foil. But the export market will face greater pressure if a YoY growth were to be achieved in the second half of 2022 because of the high base in the second half of last year. And overseas consumption has shown signs of contracting, which will also have an impact on China's exports. In addition, the current price difference between China and abroad will also bring pressure on the export of Chinese aluminium products. At present, it seems that the packaging industry in Europe and the United States is still prosperous, generating sound demand for Chinese aluminium products.

Let’s look back to the end consumption. SMM believes that end consumption is mainly contributed by the automotive industry and the infrastructure sector, and it may be difficult to see increments in the real estate industry in the short term.

For domestic real estate, based on the data released by National Bureau of Statistics, the real estate industry is still relatively weak, evidenced by the purchased land area, new housing starts, sales data, etc. The central government has introduced policies to revive the market, but it needs time to see whether they are effect. The market believes that there is still room for the real estate to turn even poor.

The automotive industry suffered from a shortage of parts supply due to the COVID lockdown of Shanghai, resulting in a faster decline in automotive production, which, luckily, gradually rebounded in May. In the coming months, production and sales in the automotive industry will continue to maintain an upward trend. The main reason is that the introduction of consumption promotion policies, such as car purchase subsidies and purchase tax exemptions, will great stimulate the consumption. The automotive industry players hold an optimistic attitude toward the production in the rest of 2022, and the demand for aluminum will also rise steadily.

In addition to this, SMM believes that market players can hope for better infrastructure investment because the issued investment in the first five months of 2022 have not been fully received by the entities. Therefore, in the second half of the year, sectors include electricity, photovoltaic, power grid, high-speed rail are expected to generate great demand for non-ferrous metals.

At the same time, in the longer term, the country will invest heavily in renewable energy, which will also facilitate the construction of large scale infrastructures for renewable energy. As such, SMM is optimistic about the demand side in the second half of the year.

Overseas supply-side risks will extend into the second half of the year, and domestic stocks may accumulate

According to the national aluminium supply-demand balance index produced by SMM, it can be seen that the consumption in 2022 is expected to grow slightly by 0.5% compared to 2021, basically the same as last year. But on the supply side, the annual output is expected to exceed 40 million mt, up 5.1% year-on-year, mainly because of more new capacity, especially the hydropower-based aluminium projects in Yunnan, have been or will be put into production. SMM believes that, under the premise of guaranteed power supply, the commissioning progress in the second half of the year will grow quickly. Therefore, though the demand will be boosted in the second half of the year, the aluminium stocks are likely to accumulate in the fourth quarter amid quickly rising supply.

In terms of the current supply and demand situation overseas, there has been a 200,000-mt production cut by American Century Aluminum. As the winter comes, there is also the possibility that aluminium smelters and zinc smelters in Europe will see a reduction in production if power supply continues to be tight. Electricity in Europe is currently purchased in the form of spot with higher cost. The market therefore allows smelters to sell back power contracts to the grid to meet other consumers’ power needs. As the sell back price is higher than the purchase price, smelters can also ensure their profits through this way. Overall, the supply side overseas is more vulnerable in winter.