SHANGHAI, Jan 29 (SMM) - According to SMM statistics, as of January 29, 2023, the domestic aluminium inventory was 929,000 mt, an increase of 185,000 mt compared with the pre-holiday inventory (January 19). The domestic inventory of aluminium billets added 35,300 mt to 167,200 mt. In south China, the inventory of aluminium ingots stood at 198,700 mt, an increase of 43,400 mt, and the inventory of aluminium billets stood at 83,700 mt, up 16,800 mt. SMM estimates that the inventory of aluminium ingots in south China will be close to 215,000 mt on January 30, the first trading day after the Chinese New Year (CNY) holiday, with an increase of 60,000 mt. Meanwhile, the aluminium billet inventory will gain about 20,000 mt to reach 90,000 mt. In other words, the total aluminium inventory will rise by 80,000 mt within three days after the production resumption post the CNY holiday. That said, the increase still falls shy of the previous forecast of 115,000 mt.

According to SMM data, the national aluminium billet inventory increased by 35,000 mt or 26.7% during the CNY holiday. Compared with the inventory data during the same period in the past five years, this year's inventory increment ranks only fourth. In other words, the amount of increase is acceptable. In south China, the inventory of aluminium billets stood at 83,700 mt, a relatively low level during the past five years and only higher than that in 2020. In terms of conversion margins, on the last trading day before the CNY holiday, the conversion margins of φ90 and φ120 aluminium billets were 200 yuan/mt and 100 yuan/mt respectively, an absolute low level compared with the data in the past two years.

In the past two years, the aluminium billet inventory showed an inverted V-shaped trend during the CNY holiday. Although the inventory usually climbed after the holiday, it will immediately fall from highs. In contrast, the conversion margins usually show an upward trend after the CNY holiday.  

What about post-holiday inventory and conversion margins this year?

SMM predicts that the previous pattern will remain this year. Specifically, the aluminium billet inventory will surge high before falling rapidly, while conversion margins will fluctuate upwards. The reasons are as follows. First, the current conversion margins are low, which indicates a sufficient upward room for rebound. As the accumulation of stocks during the holiday misses the expectation, the market is confident that conversion margins will pick up after the holiday without the pressure of high inventory. Second, the economy is sure to recover with the pandemic under control, and the consumption is likely to pick up. Before the holiday, most downstream extrusion factories took holidays early without restocking in advance, resulting in a sharp drop in the outflows of billets from the social warehouses. The muted trades once triggered bearish sentiment. However, there are signs of an economic recovery and thriving consumption after the holiday. The demand for aluminium billets will rebound with the rising operating rates of extrusion factories. Therefore, it is expected that the aluminium billet inventory will be consumed, though it will take time. Before the holiday the aluminium prices in south China soared above 10,000 yuan/mt, and the most-trade SHFE aluminium contract also showed huge momentum. During the CNY holiday, LME aluminium consolidated at highs and as of January 29 rose by 0.52% compared with pre-holiday. If SHFE aluminium opens high tomorrow and moves sideways at high levels, the conversion margins of aluminium billets in south China will rebound. SMM thinks that the conversion margins of φ120 aluminium billets are likely to return to above 200 yuan/mt.