SHANGHAI, Jan 11 (SMM) - Macro front: The US initial jobless claims stood at 225,000 in the week ending December 24, an increase of 9,000 on a weekly basis. The US labour market cooled slightly, alleviating concerns over aggressive interest rate hikes by the US Federal Reserve (Fed). Inflation in the UK was stubbornly high, with CPI rising 10.7% year-on-year in November. The Bank of England raised interest rates by 50 basis points in December to tackle high inflation. Vice President of the European Central Bank (ECB) maintained a hawkish stance, saying that the ECB's interest rate must be higher in order to curb inflation. As many countries continued to raise interest rates, market concerns about economic recession intensified. China officially lifted its Covid restrictions in December. Starting from January 8, 2023, China has downgraded the management of Covid-19 from Class A to Class B, marking a major shift of the country’s covid response policies. The Chinese government issued the Strategic Outline for Expanding Domestic Demand (2022-2035), and repeatedly voiced support for the real estate industry.
Fundamentals: Aluminium smelters in Guizhou were subject to three rounds of power rationing, which is estimated to have reduced the local aluminium capacity by 450,000 mt in December. Despite production resumptions in Sichuan and Guangxi, the domestic operating aluminium capacity still showed a downward trend. As of early January, the domestic operating aluminium capacity stood at 40.43 million mt. Considering additional output reduction in Guizhou and slowdown of production resumptions in Sichuan and Guangxi, SMM estimates that the domestic aluminium production will fall to around 3.4 million mt in January. Falling coal prices slightly lowered the power costs of smelters with captive power plants in December, but grid power tariffs and hydropower prices remained high. The benchmark prebaked anode purchase prices fell sharply in January, and coal prices extended the declines. As such, the costs of smelters are estimated to drop 250-300 yuan/mt month-on-month this month. On the demand side, the downstream operating rates stayed at a low level in December and fell at the end of the month as more employees were infected with Covid. Construction aluminium extrusion and aluminium plate/sheet, strip and foil sectors were in the off-season, leading to a decline in new orders. Thanks to limited arrivals of cargoes at the market, the domestic aluminium ingot social inventory remained low in December and was far below the level in the same period of previous year. However, the social inventory started to accumulate at the end of December as downstream demand weakened.
From a technical point of view, the most-traded SHFE aluminium contract may rebound slightly before going down again from January 11 to February 11, and is likely to bottom out in early February. Forecasts based on the time series model are as below: 1. The average price of SMM A00 aluminium will fluctuate downwards after a slight rebound. 2. LME aluminium will be vulnerable to decline. 3. The 20-day moving average of the difference between spot aluminium buying and selling intensity index will rise initially and then fall back. 4. The aluminium ingot social inventory will stabilise after accumulation. 5. The SMMI will face downward pressure. 6. The US dollar index will drop. The machine learning indicates that the most-traded SHFE aluminium contract will fluctuate downwards after a mild rally. The random forest & time series model predicts that the price range of the most-traded SHFE aluminium contract will be [17430, 18860], and the extreme price range will be [17050, 19120]. The time series model predicts that the range of SMM A00 aluminium average price will be [17410, 18820], and the extreme range will be [17090, 19080], with a rally expected in early February. The futures technical indicators suggest that the most-traded SHFE aluminium contract may fall initially and then go up. Based on the monthly K-line, SMM observed a total of 43 technical indicators, of which 26 were neutral, 7 were bullish, and 10 were bearish. Bearish signals outnumbered bullish ones. After combining machine learning and technical indicators, SMM predicts that the most-traded SHFE aluminium contract will rebound slightly and then go down again, with a potential rally in early February. The most-traded SHFE aluminium contract may encounter resistance in the range of [18800, 19100] while finding support in the range of [17000, 17400].
The US Fed’s December policy meeting showed that Fed policymakers were still focused on curbing inflation, with no intention of cutting interest rates in 2023. The US CPI for December 2022 will be released on Thursday January 12, which may set the tone for the Fed's first interest rate hike in 2023.
On the fundamentals, the Europe and the United States have set benchmark prices for natural gas, dampening the enthusiasm of natural gas suppliers. Alcoa's alumina refinery in Australia reduced its production due to natural gas shortages. The market was concerned about future aluminium supply. In January, the operating aluminium capacity in China may continue to drop slightly. Downstream enterprises will be shut down in late January for the CNY holiday. Aluminium ingot inventory will continue to grow amid poor trades in the spot market. Despite falling production, expectations for a significant increase in aluminium inventory in the off-season will weigh on aluminium prices. After taking into account macro front and energy issues, aluminium prices are likely to fluctuate wildly. SMM will closely watch downstream production resumptions after the CNY holiday and inventory changes.