Shrinking Supply and Cost Support to Put A Brake on Decline in Aluminium Prices

SHANGHAI, Jan 9 (SMM) - On the macro front, the US ADP employment far exceeded market expectations last week. And the latest US initial jobless claims touched a three-month low. Employment data showed that the US labour market remained resilient, reinforcing expectations for monetary tightening by the US Federal Reserve (Fed). However, the Fed said that interest rates were close to restrictive highs. The US dollar index recovered half of its losses, and commodities did not fall steeply. In China, multiple government departments voiced additional support for small and micro enterprises and the real estate market. Economic stimulus policies boosted market confidence, but it will take time for them to deliver positive effect on the economy. The end consumption remained sluggish.

Fundamentals: Guizhou imposed a third round of power rationing on local aluminium smelters, which is estimated to reduce the domestic operating capacity to 40.1 million mt. The new and restarted capacity has not yet released output. The overall supply shrank. On the demand side, downstream operating rates declined as end projects were halted with the approaching Chinese New Year. The aluminium ingot social inventory increased by a whopping 84,000 mt, sending aluminium prices below 18,000 yuan/mt. The current aluminium prices are close to smelters’ costs, which may somehow provide certain cost support.

To sum up, the dramatic fall in aluminium prices was triggered by worsening fundamentals and sharply increasing social inventory. However, shrinking supply and cost support should allow aluminium prices to stabilise. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 17,400-18,600 yuan/mt and $2,200-2,350/mt respectively this week.