Favourable Policies Boost Aluminium Prices, but Weak Demand and Rising Inventory Limit Increases

SHANGHAI, Jan 13 (SMM) - On January 12, SHFE aluminium recorded a four-day win streak and returned to above 18,000 yuan/mt. The increase mainly stemmed from the eased pressure from US dollar and the boost from supply-side production cuts. However, the persistent weak demand also caused a slowdown in the increase. At of the noon of January 12, the most-trade SHFE aluminium gained 0.58% to 18,340 yuan/mt.

On the same day, the spot price of SMM A00 aluminium ingot stood at 18,550-18250 yuan/mt as of January 12, with an average of 18,230 yuan/mt, up by 120 yuan/mt from the previous trading day and also posting a straight increase on the fourth day.

On the macro front overseas, the market's expectations for the Fed to slow down interest rate hikes have resulted in weak US dollar in recent days, so the pressure on the commodity market has eased. In addition, foreign investment banks were upbeat about China's economy. For instance, Goldman Sachs released a forecast stating that more proportion of global GDP will shift to Asia in the coming 30 years. In particular, the investment back suggested that China may surpass the United States in 2035 and become the world's largest economy.

Domestically, the newly released data showed that China's CPI in December were flat from the previous month following a 0.2% drop a month ago. The PPI declined on the month, and the prices in December were generally stable.

But the fundamental front has triggered mixed sentiments. Production reduction has eased the supply pressure in January, but the market transactions were still slack as a result of sluggish demand in the off-season. In addition, the inventory continued to climb and suppressed the upward room of aluminium prices, though it still stayed low.

On the supply side, SMM statistics show that the installed domestic aluminium capacity as of the beginning of January stood at 45.26 million mt (including the capacity that has been built but has not been put into production), and the domestic aluminium operating capacity was 40.43 million mt.

In January, no considerable increase is expected in the production of aluminium. On the contrary, the power shortage in south-west China will remain unsolved in the short term, and aluminium producers in Guizhou continued to significantly reduce their production by an estimated 400,000 mt. In addition, the production resumption of aluminium smelters in Sichuan and Guangxi was slow due to power shortage and low profits.

Based on the capacity changes, SMM estimates that the domestic operating capacity of aluminium at the end of January may fall to 40.10 million mt. The aluminium output in January is projected at about 3.40 million mt, up 6.2% on the year.

On the demand side, it was still in the off-season of consumption, and as the Chinese New Year holiday approached, the downstream demand of aluminium became weaker. However, it is worth noting that the pre-holiday restocking demand of downstream aluminium processing enterprises has given a little boost to the demand for aluminium ingots, though the demand was lower than in previous year. 

In terms of inventory, it kept rising as the seasonal accumulation cycle began. According to SMM statistics, as of January 12, the domestic social inventory of aluminium was 642,000 mt, an increase of 6,600 mt from last Thursday, up 149,000 mt from the end of December, and down 83,000 mt from the same period last year.

Moreover, the upcoming CNY holiday constrained the downstream consumption of aluminium, while the output of domestic aluminium enterprises was on the rise. It is expected that the social inventory of aluminium in China may continue to accumulate in January.

In general, after the overseas positive factors on the macro front faded away, the domestic favourable policies started to enhance the market expectations. But, as the downstream enterprises are gearing up for the holiday and the inventory is building up rapidly, there is still resistance to the growth of aluminium prices.