Aluminium Billet Conversion Margins in South China to Rebound as Post-CNY Inventory Accumulation Falls Short of Expectations

SHANGHAI, Feb 3 (SMM) - According to SMM statistics, the domestic aluminium ingot social inventory added 185,000 mt from pre-Chinese New Year (CNY) holiday level (January 19) to 929,000 mt as of January 29, the second day after the week-long CNY holiday. Similarly, the aluminium billet social inventory climbed 35,300 mt to 167,200 mt.

In south China, the inventory of aluminium ingots and billets rose 43,400 mt and 16,800 mt respectively to 198,700 mt and 83,700 mt. After taking into account the non-publicly disclosed data and cargoes in transit, the inventory of aluminium ingots and billets in south China would be close to 215,000 mt and 90,000 mt respectively on the first trading day after the CNY holiday (January 30), an increase of approximately 60,000 and 20,000 mt from pre-holiday levels.

Within three days after the CNY holiday, the inventories of aluminium ingots and billets in south China accumulated a combined 80,000 mt, but the figure was far below the forecast. According to SMM’s survey of warehousing companies half a month ago, a total of 115,000 mt of aluminium ingots and billets should have arrived in south China during the CNY holiday.

In terms of aluminium billets, the domestic social inventory added 35,000 mt or 26.8% during the CNY holiday. However, the inventory increment during the 2023 CNY holiday actually ranked just the fourth when comparing with that in the past five years.

A glance at the past five years showed that the inventory in south China after this year’s CNY holiday was only higher than that in 2020. The conversion margins of φ90 and φ120 aluminium billets in south China stood at 200 yuan/mt and 100 yuan/mt respectively on the last trading day before the CNY holiday (January 20), which were at a low level over the past two years.

The post-CNY inventory changes used to show an inverted "V" pattern in the past two years – stretching the seasonal accumulation before falling back to average level for the year within two or three months. The conversion margins used to enter an upward trend after the CNY holidays in the past couple of years.

SMM sees a high probability that the inventory and conversion margins in south China after the 2023 CNY holiday will show similar trends as in the past two years, citing three reasons. 1. The current conversion margins are at a low level, giving it the potential for significant rebound. 2. The inventory accumulation during the 2023 CNY holiday fell short of expectations. 3. With fading impact from the pandemic, the consumption will pick up along with economic recovery. Most aluminium extruders were shut down early for the CNY holiday, but will restock after running out of inventories following the holiday. Optimism over economic recovery after China lifted its Covid restrictions will drive aluminium extruders to ramp up their production, boosting the demand for billets.

Aluminium prices in south China exceeded 19,000 yuan/mt before the CNY holiday, and SHFE aluminium got off to a good start after the holiday. LME aluminium fluctuated upwards during the CNY holiday.

Should SHFE aluminium stay at highs, the conversion margins of φ120 billets could potentially rebound to above 200 yuan/mt. That being said, market players still need to be alert to the impact from volatile SHFE aluminium prices.