SHANGHAI, Jul 21 (SMM) - SMM believes that the driving logic of aluminium prices in 2022 has altered. And in the second half of the year, more attention should be paid to the domestic demand amid normalised pandemic prevention and the changes of overseas macro markets. At the same time, according to SMM survey, by the end of June, the domestic operating aluminium capacity had recovered to more than 42 million mt. With the increasing supply pressure and slow recovery of downstream consumption, market players shall stay cautious toward aluminium price moves, coupled with cost support.
I. Attention shall be paid to domestic driving force and overseas macro market dynamics
Looking at the trend of aluminium price in recent years, it has basically entered an upward channel since drastic falls in 2020 when the pandemic first broke out. However, the supply decelerated in April, 2021 amid stronger estimate of production reduction on the back of China’s carbon peak and carbon neutrality targets, when aluminium prices dropped shortly before rallying to historical high. After October 2021, under the influence of national policies such as power rationing and production restrictions, aluminium prices fell sharply. Nonetheless, as the market gradually picked up, aluminium prices rebounded accordingly. Entering 2022, under the influence of the Russian-Ukrainian tensions and overseas production cuts, aluminium prices rose again at the beginning of the year. And aluminium prices in recent months were mainly affected by the domestic pandemic that significantly suppressed the demand and the acceleration of production resumption after the pandemic subsided. And more recently, under the influence of pessimism arising by economic recession fears, aluminium prices have continued to decline.
On the whole, it is believed that the driving logic of aluminium prices in 2022 has altered. And in the second half of the year, more attention should be paid to the domestic demand amid normalised pandemic prevention and the changes of overseas macro markets.
From the perspective of national policy, after 2020, the carbon peaking and neutrality policy have continued to re-shape the aluminium industry, and the capacity quota has played an increasingly bigger role in limiting the capacity growth. In particular, the restriction toward new aluminium capacities that are equipped with captive power plants or use thermal power is strict, which promotes capacity restructuring and relocation. The increase in carbon emission transaction costs as well as other tax costs in the future will also heighten the hidden costs of the industry, which also accelerates the transition to renewable energy. At the same time, under the background of carbon peaking and neutrality, green and low-carbon aluminium is more favoured by the market, and the recycling of aluminium has also been given more attention.
II. Rising supply pressure with accelerated resumption of production as well as slow recovery on the demand side will weigh on aluminium prices
In 2022, the resumption of aluminium capacity in China has accelerated, mainly due to the gradual relaxation of the restrictions concerning the carbon policies, and the ease of power supply has further promoted the resumption of production. With the implementation of the tiered electricity pricing and the peak-to-valley electricity pricing as well as the cancellation of the preferential electricity prices, the power plants finally regain the profits, easing the electricity supply tightness. At the same time, the continuous increase in the profitability in the overall aluminium industry have also preserved the production willingness of aluminium smelters.
According to SMM survey, power situation in Yunnan has been improving, and the resumption of production has increased since December 2021. In the first half of 2022, the resumed aluminium capacity was higher than expected, which exceeded 2.5 million mt. By the end of June, the domestic operating aluminium capacity had recovered to more than 42 million mt. However, it is expected that the growth rate of new and resumed production capacity may slow down by 2023.
Overseas, the soaring energy cost has constantly restricted overseas aluminium supply, and production growth is even more unlikely. According to SMM statistics, as of June 10, the restricted production capacity overseas due to energy problems has exceeded 900,000 mt. Although there are production cuts, the newly added capacity overseas exceeds 4 million mt.
In terms of import and export, the domestic aluminium import window was closed in the first half of 2022, and the year-to-date imports hence dropped YoY. As domestic aluminium prices continued to underperform the overseas, aluminium export has been quite active. Meanwhile, the Rusal sanctions led to a change in the overseas trade pattern, and the longer trade process has led to an increase in the dependence of Western Europe, North America and other countries on Chinese aluminium products. In 2022, the overall SHFE/LME price ratio has accelerated the export growth. However, in the second half of the year, market players shall be alert to the possibility of contracting external demand. In addition, the PMI data of the aluminium processing industry improved in June, and there are hidden concerns about the export stall.
Looking back to domestic downstream consumption of aluminium, the impact of the pandemic is mainly concentrated in the aluminium processing sector. The weekly operating rates of leading aluminium processing enterprises declined in April and May, resulting in a YoY decline in aluminium consumption in the second quarter. With the stabilisation of the pandemic situation, the downstream consumption recovered, but the recovery was slower than expected.
In general, domestic operating aluminium capacity is likely to rise constantly in the second half of the year, while the downstream is recovering slowly. Therefore, SMM believes that the domestic aluminium supply will grow more quickly than the consumption in the fourth quarter, leading to a potential supply surplus.
In terms of inventory, the overall inventory in 2022 will be in the middle level based on the histrionic data, which also happens to other metal varieties. In the short term, as the supply of aluminium ingots and billets rise quickly, the inventory is likely to return to the upward cycle this year.
When it comes to prices, the overseas spot premiums have pivoted, but the domestic premiums have not yet rebounded. According to SMM survey, the national average weighted complete cost of aluminium in June was 17,505.3 yuan/mt, and more than 20% of aluminium capacities suffered losses when aluminium prices dropped below 18,000 yuan/mt.
Therefore, on the whole, the cost of aluminium is unlikely to fall significantly, alluding firm cost support. However, as the pressure on the supply side still exists and the demand side has not yet ushered in palpable recovery, the aluminium prices shall be taken with caution.