SMM Analysis: The PMI For Chinese Aluminum Processing Sectors Remained In Contraction Territory In December, With Environmental Protection-Driven Restrictions Being The Main Drag

SMM data showed that the PMI for China’s aluminum processing sectors dipped 3.7 points MoM to 43.6% in December, remaining below 50%. December was in the off-season for terminal demand and production was restricted for environmental protection reason, therefore, the production index fell 6.3 points MoM to 39.9%, and the purchasing volumes of raw materials also decreased. Driven by pre-holiday stocking in the overseas market, the new export orders started to pick up. It is worth noting that according to SMM research, in December, due to the announcement of the winning bids of the State Grid UHV and power distribution projects, the orders on hand for cable companies increased, driving the new orders index to rise by 1.6 points MoM; however, as the aluminum prices hit the highest, coupled with the continuously falling demand in most sectors, enterprises lacked incentive to purchase and restock, thus the index for procurement and inventory showed a downward trend. At the end of the year, enterprises accelerated to collect payment and digest the finished products, and the finished product inventory index fell by 21.6 points in December.

Aluminum plate/sheet and strip: The PMI for aluminum plate/sheet and strip sector dipped 4.2 points MoM to 42.8% in December. The aluminum plate/sheet and strip industry changed little compared with November for most of December, but the overall demand gradually weakened. At the end of December, Henan, a major producing province of aluminum plate/sheet and strip, ushered in environmental protection inspections. Many companies were required to reduce production. At the end of the month, the number of orders on hand and inventory fell sharply MoM. The environmental inspections are expected to end in early January, that is, various data of Henan aluminum plate/sheet and strip companies are expected to rebound MoM at the end of January. Therefore, the PMI of the aluminum plate/sheet and strip sector in January is expected to rebound to above 50% at 55.9%.

Aluminum foil: The PMI for the sector rose 17.2 points MoM to 47.7%, remaining in the contraction territory in December. The performance of the aluminum foil industry was relatively stable in December. Some companies saw MoM declines in order volume and output as market consumption gradually weakened. In December, Henan and other places ushered in environmental protection inspections, weighing on the production of some companies. Consumption in January may be even more sluggish than in December, and the PMI of the aluminum foil industry in January is expected to be around 37%.

Construction aluminum extrusion: The PMI index for the sector declined significantly in December, recording at 40.12%. The index for production and new orders declined significantly, recording at 33.95% and 37.34% respectively. As the aluminum extrusion sector entered the traditional off-season in December and companies focused on increasing cash flow, the shipments to buyers who have placed orders but not yet made payments are suspended or reduced, affecting the enterprise production and orders; on the other hand, due to environmental inspection, companies in Beijing-Tianjin-Hebei, Shandong, Henan and other places cut production significantly, or even suspended production for 2-3 days, leading to weak production and a slight rise in backlog order index, recording at 51.47%. The inventory index of finished products was recorded at 61.44%. As the weather turned colder, shipments in Shandong, Henan, Hebei and other places were affected by rain and snow, but have now gradually resumed. Affected by weak overseas demand and the Christmas holiday, new export orders turned quiet. According to SMM research, export orders of some companies in Shandong have declined significantly due to political turmoil in the Middle East. The new export orders index remained below 50% in December, and recorded at 48.90%. Due to weak terminal demand and insufficient new orders, raw material purchases have subsequently decreased, remaining in the contraction territory and recording at 46.57%. The raw material inventory index is relatively stable, remaining in the contraction territory and recording at 40.08%. After entering the traditional off-season at the end of the year, and some producers cut output for the Chinese New Year, combined with weak terminal demand and lack of market confidence, the downstream producers showed little interest in stockpiling. The PMI of the construction aluminum extrusion sector is expected to remain below 50% in January 2024.

Industrial aluminum extrusion: The PMI for the sector stood at 50.15% in December, remaining above 50%. The production index recorded at 52.61%. However, according to SMM research, the environmental protection inspections in Beijing-Tianjin-Hebei, Hebei, Shandong and other places have affected the production of some enterprises, and we still need to continue to track when they will resume; the new orders index recorded at 47.13%, mainly due to the off-season at the end of the year and slower growth in downstream orders with CNY drawing near. Affected by year-end stocking, the index for purchasing volume of raw material for processing companies increased, recording at 63.66%. In addition, aluminum prices fell back in the first half of the month, coupled with an improvement in orders from related industrial aluminum extrusion sectors, companies appropriately increased their purchases of raw materials, and the raw material inventory index recorded at 56.68%. Although overseas demand was weak, as Christmas had approached, companies stocked up before the holiday, and the index of new export orders for industrial aluminum extrusion was above 50%. At the end of the year, due to the order settlement and year-end stocking, it is expected that the PMI of the industrial extrusion segment may stabilize or fall only slightly in January.

Aluminum wire and cable: The PMI for the sector was 53.2% in December, up 1.1 points MoM, and is still above 50%. The overall operating of domestic aluminum wire and cable companies declined slightly in December, with the production index falling 8.4% MoM to 46.7%. This was mainly due to the slight slowdown in terminal delivery, coupled with the increase in aluminum prices in late December, and the willingness of companies to produce weakened. In December, due to the announcement of winning bids for State Grid's UHV and power distribution projects, companies' orders on hand increased, and new orders index of aluminum wire and cable rose 10.8% MoM to 64.1%. The overall operating rate of enterprises has remained at a high level since December to delivery of backlog orders. The backlog orders index fell by 2.9% MoM to 42.8%, with little overall change. In December, aluminum cable and wire companies stocked only as needed. Since companies had certain raw materials in stock, they were not keen to stock up in December. The index for purchasing volumes recorded at 48.3%, a MoM decrease of 5.1%. The raw material inventory index recorded at 47.3%, a MoM decrease of 1.7%. The delivery of goods at power grid terminals may slow down slightly in January, and companies are keen on increasing their cash flows at the end of the year. The operating of enterprises may decline. The PMI index of the aluminum wire and cable sector is expected to fall back to around 50% in January.

Primary aluminum alloy: The PMI for the sector down 10.5 points MoM to 36.5 in December. The market demand for primary aluminum alloy further weakened in December, and environmental inspections disrupted production in some areas. This led to a MoM decline in orders and output for many companies, driving the sector PMI below 50%. The demand side is unlikely to see turnaround in January. It is unclear when the environmental protection inspections will end. The industry PMI is difficult to rise above 50%, and is expected to be 47.7%.

Secondary aluminum alloy: The PMI for the sector declined by 6.4 points MoM to 45.9% in December, falling back to below 50%. On the demand side, secondary aluminum consumption weakened slightly in December, and most companies reported a decrease in new orders. At the same time, due to the rapid rise in ADC12 prices, downstream producers only restocked as required. Therefore, the finished product inventories of secondary aluminum alloy companies have accumulated. In terms of supply, affected by factors such as snowfall in the north and environmental protection inspections, the circulation of aluminum scrap has become tighter than in November. Some companies have lowered their operating rates due to shortages of raw materials or losses; in addition, after mid-December, due to tougher production curbs, the companies in Hebei, Anhui, Shandong and other regions where secondary aluminum factories are concentrated, have reduced and suspended production. In January, with the Chinese New Year drawing close, the new orders and output of secondary aluminum alloy factories will decline, and PMI is expected to continue to remain below 50%.

As we head into 2024, the first quarter is the off-season for most aluminum processing companies. As the Spring Festival is drawing close, companies are planning production cuts and vacations based on their situation, and the new order index may continue to weaken. It is worth noting that due to production cut for environmental protection in December, the backlog orders for some companies on hand have increased, they may rush to deliver orders after resuming production in January. At the same time, in order to ensure safe production in the new year, some companies said that they will appropriately reserve raw material inventories. Overall, affected by the upcoming Spring Festival holiday, the PMI of the domestic aluminum processing sector is expected to remain below 50%.