Despite Supply Concerns Caused by Overseas Energy Crisis, Aluminium Prices Lack Upward Momentum due to Weak Demand

SHANGHAI, Aug 8 (SMM) – The most-traded SHFE 2209 aluminium contract opened at 18,190 yuan/mt last Monday, with its weekly low and high at 17,885 yuan/mt and 18,645 yuan/mt respectively before closing at 18,515 yuan/mt on Friday afternoon, down 235 yuan/mt or 1.25% on the week. LME aluminium opened at $2,481.5/mt last Monday, with its weekly low and high at $2,358/mt and $2,481.5/mt respectively before trading at $2,414.5/mt as of CST 15 on Friday, up 2.7% on the week.

On the macro front, the Bank of England (BOE) announced to raise its interest rate by 50 basis points to 1.75%, the largest rate hike since 1995 and the highest rate since December 2008. The BOE has raised interest rates for the sixth time in a row since December 2021. The BOE warned that the UK economy will shrink from the fourth quarter of this year and will contract throughout 2023, making it the longest recession since the financial crisis. Glencore warned that while risks to industrial metals demand were rising, the power crisis in Europe also weighed heavily on the supply outlook.

In terms of fundamentals, aluminium smelters in Guangxi and other regions slowed their production resumption amid poor profitability. According to preliminary estimates by SMM, the domestic operating aluminium capacity increased just 300,000 mt in July when compared with the end of June.  The output increase was mainly contributed by smelters in Yunnan and Gansu, while smelters in Sichuan and Shandong reduced their production slightly. Should aluminium prices continue to fall, more high-cost smelters may cut their production in the future. Smelters in Europe are under mounting cost pressure amid the persistent energy crisis, triggering expectations for output cuts. The domestic downstream demand remained poor, causing spot prices to climb more slowly than SHFE aluminium prices as well as widening spot discounts. The aluminium ingot social inventory accumulated amid low operating rates of downstream enterprises.

Although the domestic aluminium supply ramp-up slowed down, the total output maintained year-on-year growth. Downstream consumption is still in the off-season. Domestic high-cost smelters are expected to lower their production amid weak aluminium prices and rising costs. Given the mix of bullish and bearish factors, aluminium prices may fluctuate rangebound. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 18,000-19,300 yuan/mt and $2,380-2,480/mt respectively this week. Under the circumstance of the global economic recession and growing domestic supply, investors are advised not to raise their long positions at higher prices.