[SMM Monthly Forecast] Aluminium Prices Likely to Be Subject to Demand Side amid Potentially Extending Losses

SHANGHAI, Aug 5 (SMM) - At the beginning of July 2022, the most-traded SHFE aluminium contract extended its decline, and the prices kept touching new lows. The SHEF 2209 contract bottomed at 17,000 yuan/m in mid-July, and then barely rebounded under the support of costs and low inventory. At the end of July, the US Fed raised interest rates by 75 basis points. Although it was in line with market expectations, the Fed mentioned that it would slow down the pace of rate hikes at a certain point in time. And this dovish signal fuelled an extensive rebound among non-ferrous metals. SHFE 2209 contract touched a high of 18,780 yuan/mt after the market pessimism was repaired, and closed the month with a drop of 1.97% or 375 yuan/mt at 18,650 yuan/mt. In July, the spot market demonstrated clear signs of seasonal low, and the prices dropped palpably. The SMM average aluminium spot price recorded 18,135.7 yuan/mt in July, a drop of 9.2% MoM. 

The industry cost decreased slightly in July, but the diving aluminium prices extended the losses

In July, the prices of alumina and prebaked anode fell slightly. The cost of grid electricity also declined due to the arrival of the wet season in Sichuan and Yunnan provinces, while the cost of captive power plant and thermal power changed little. The price of thermal power in Guangxi and Henan provinces was still at a high level of 0.6 yuan/kWh. According to SMM statistics, the average electricity price of domestic aluminium smelters in July was 0.434 yuan/kWh, down 0.012 yuan/kWh from the previous month. Also according to SMM, the weighted full cost of domestic aluminium in July was about 17,348 yuan/mt, down only 0.9% month-on-month. As such, the high cost and deep drop in aluminium prices have greatly squeezed the industry profits. The average profit of domestic aluminium smelters was 788 yuan/mt in July, down 1960 yuan/mt from the previous month. Among them, around 9.9 million mt of aluminium capacity was with a full of over 18,000 yuan/mt, accounting for 24% of the total operating capacity, which was mainly distributed in south-west China and Henan province.

In August, the aluminium cost is expected to decline further. The monthly price of prebaked anode has been brought down by 200 yuan/mt, and alumina prices may also decline slightly. In addition, the cost of electricity has fallen sharply due to the sharp drop in coal prices. SMM predicts that the average cost of the industry in August may be around 17,100 yuan/mt, but high-cost smelters in places such as south-west China and Henan may still suffer losses. 

Diving aluminium prices weighed on the ramp-up of operating capacity in July

As is mentioned in the cost section above, the profitability of the domestic aluminium industry narrowed sharply in July. Under the circumstance that aluminium prices fell sharply, high-cost aluminium smelters in south-west China and other places have already suffered losses, and the industry's enthusiasm for ramping up the production waned significantly. In detail, the progress of production resumption in Guangxi province was slow, and the sporadic re-start of smelters in July contributed little to the production growth. The increase in domestic operating capacity mainly came from new and resumed capacity in Gansu and Yunnan provinces. In addition, the high temperature in Sichuan province in July resulted in tight electricity supply in the region. Some aluminium smelters voluntarily shut down their equipment to ease the local electricity shortage, engaging a total capacity of around 70,000 mt. According to SMM preliminary estimates, as of the end of July, the total operating aluminium capacity stood at about 41.35 million mt, an increase of only about 300,000 mt from the previous month. Domestic aluminium output is estimated at 3.49 million mt in July (31 days), an increase og 6.4% YoY.   

Downstream operating rates fell in July amid seasonal low, and are unlikely to improve significantly in August

According to SMM data, the composite PMI of the domestic aluminium processing industry dropped 6.5 points from the previous month to 45 in July, falling to the contraction zone again. July is a traditional off-season for the aluminium processing industry. Fewer new orders were received during this period, and enterprises reduced the production extensively. The output of the aluminium sheet/sheet and foil industry declined significantly, and enterprises reported falling orders from home and abroad. The extrusion section was restricted by the sluggish demand in the real estate industry, and the operating rates remained low. The power and automobile-oriented aluminium also suffered from insufficient orders due to various factors such as high temperature and summer vacation. Entering August, the situation has not yet improved significantly according to the current order feedback from downstream enterprises. It is expected that the downstream players will schedule their production according to the terminal demand, and the orders are likely to pick up at the end of August or in September. 

The exports of aluminium semis increased significantly year-on-year in the first half of 2022, and are expected to maintain YoY growth in the second half

According to customs data, China's aluminium semis exports in June 2022 were 584,000 mt, an increase of 31.4% year-on-year and a drop of 1.25% month-on-month. The export profits in June dropped MoM, but were still at a high level. In addition, under the circumstance of insufficient production of overseas aluminium smelters and processing enterprises, domestic aluminium export market is expected to remain robust in the second half of 2022. However, due to the fall in export profits and potential overseas economic recession, the aluminium semis exports from July to August will be difficult to surpass the high seen in May this year.

Aluminium ingot and billet inventory was dragged on by weak consumption in July, and are likely to keep accumulating in August

In July, the social inventory of aluminium failed to de-stock smoothly. Both aluminium ingot and billet stocks accumulated amid concentrated arrivals and poor downstream demand in south China. SMM data shows that the total social inventory of domestic aluminium ingot stood at 678,000 mt as of the time of this writing, down merely 56,000 mt from the beginning of July; the inventory of billet added 10,000 mt from early July to 116,400 mt. In addition, the in-plant inventory also rose as some loss-making aluminium smelters were less willing to sell amid diving aluminium prices.

If the consumption fails to improve significantly in August while the arrivals of aluminium products are busy, aluminium ingot social inventory carries the possibility of a slight increase. 

SMM comments:

In August, due to the resumption and commissioning of capacities in Gansu, Yunnan, Sichuan and other provinces, the operating aluminium capacity will maintain a slight growth. On the cost side, falling prices of electricity and prebaked anode are likely to pull down the full cost further. In terms of the downstream, insufficient new orders will weigh on the overall consumption of aluminium. It is expected that the social aluminium inventory is still unlikely to fall significantly. Hence the pressure on the fundamentals will be serious. Nonetheless, the macro sentiment in August is better than that in July. On top of that, there will be various economic supporting facilities to be launched, which will offset the bearish factors on the macro front. On the whole, it is expected that the aluminium prices in August will fluctuate around the supply and demand dynamics before the consumption side picks up substantially. Meanwhile, it is necessary to pay attention to the impact of overseas energy on the local aluminium supply.