SHANGHAI, Jul 13 (SMM) – Under the influence of growing supply and sluggish consumption, the most-traded SHFE aluminium contract went down in the period of June 13-July 11, with its monthly low and high at 17,975 yuan/mt and 20,530 yuan/mt respectively before closing at 18,180 yuan/mt as of July 11, a loss of 2,425 yuan/mt or 11.77% on the month. Three-month LME aluminium also fluctuated downwards and moved between $2,355-2,686/mt in the same period, and traded at $2,408/mt in the afternoon of July 11, down 9.95% on the month.
From a macro perspective, the US Federal Reserve announced on June 16 to raise interest rate by 75 basis points in June and lowered its forecast for the US economy. The Caixin China manufacturing PMI was 50.2 in June, up 0.6 point from the previous month, and returned to the expansion territory after three consecutive months of contraction. The manufacturing PMI of large enterprises was 50.2, which stayed above 50 for two consecutive months. The manufacturing PMI of medium-sized and small enterprises climbed 1.9 points MoM to 51.3 and 48.6 respectively.
Fundamentals: The domestic aluminium supply maintained an increase in June, contributed by the resumption of production and release of new capacity across Guangxi, Gansu and Yunnan. The domestic operating aluminium capacity had exceeded 41 million mt to 41.05 million mt as of early July. From January to June, the domestic aluminium output increased by 0.47% year-on-year to around 19.55 million mt. However, as China’s aluminium ingot imports fell by 71% year-on-year to 168,000 mt from January to May, there was no significant surplus of aluminium ingots in the domestic market in the first half of the year, and the domestic aluminium ingot social inventories remained low in June. The operating rates of domestic aluminium downstream processing enterprises picked up slightly in June, and the recovery of the extrusion sector was more prominent. In addition, the auto manufacturing industry recovered significantly from the pandemic. As such, the domestic aluminium demand improved month-on-month, allowing the domestic aluminium ingot social inventories to drop 189,000 mt in June. However, the aluminium downstream sectors were affected by the off-season in July, and this situation has been exacerbated by high temperature in south China and sluggish real estate market. As a result, the domestic aluminium ingot social inventories now fall at a slower pace, and even rise slightly in some areas, pressuring aluminium prices. In terms of overseas demand, China’s aluminium semis exports reached 2.65 million mt from January to May, a year-on-year increase of 27%. However, such high increase might not have been sustained in June due to shrinking export profits and strong expectations for overseas economic recession.
Following the deep fall in aluminium prices, roughly 25% of the domestic aluminium capacity is currently in loss-making territory, but poor profitability has not yet triggered production cuts. It is expected that the domestic operating aluminium capacity will reach 41.4 million mt in July. The demand has shown signs of weakening due to high temperature and sluggish real estate sector. Moreover, the overseas demand for aluminium semis has also declined. As such, domestic aluminium inventories may rise slightly. In view of poor domestic fundamentals and overseas interest rate hikes, SMM predicts that SHFE aluminium will drop to 17,000-18,800 yuan/mt in the period of July 12-August 11.