Aluminium Prices to Go Down as Social Inventory Could Potentially Enter Seasonal Accumulation Cycle amid the Off-Season

SHANGHAI, Jan 3 (SMM) - Macro front: According to data released by the US Department of Labour last Thursday, the US initial jobless claims stood at 225,000 in the week ending December 24, in line with market expectations. Pending US home sales fell for the sixth straight month in November and hit the second lowest on record. Starting from January 8, 2023, China will downgrade the management of COVID-19 from Class A to Class B, marking a major shift of the country’s covid response policies. From January to November, the total profits of industrial enterprises above designated size in China amounted to 7.72 trillion yuan, a year-on-year decrease of 3.6%.

Fundamentals: Guizhou province imposed a second round of power rationing last week, and the two rounds of power rationing are estimated to affect roughly 640,000 mt of aluminium capacity. The operating aluminium capacity in China declined to 40.35 million mt at the end of December. In the future, the supply pressure in south-west China will ease. The operating rates of aluminium wire and cable, primary and secondary aluminium alloy sectors declined last week due to sharply falling new orders and increasing number of employees who were infected with COVID. The operating rates of aluminium plate/sheet, strip, foil and extrusion sectors barely changed, even as they still suffered from insufficient orders and labour shortages. Downstream consumption remained in the off-season. In response to poor sales and labour shortfalls, some downstream enterprises were planning to close early for the Chinese New Year. The downstream operating rates will hardly pick up in the short term. The social inventories of aluminium ingots and billets accumulated amid massive arrivals and sluggish consumption, and are likely to rise further.  

With China lifting its COVID restrictions across the board and striving to expand the domestic demand, market players are optimistic over the market outlook in 2023. The power rationing in south-west China dragged down the domestic operating aluminium capacity. Once downstream enterprises resume their production, regional supply shortages will occur in the first quarter. However, the short-term aluminium prices will face downward pressure due to falling domestic and overseas demand, inventory accumulation, as well as weaker cost support. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 18,300-19,000 yuan/mt and $2,350-2,500/mt respectively this week.