SHANGHAI, Jun. 23 (SMM) – News surrounding supply side reform and output cut at Weiqiao Group has allowed SHFE aluminum to make a glamorous comeback over the past couple of days. Perhaps, a deeper dig into aluminum industry chain itself might offer some clues as to where prices will go next, SMM understands.
Aluminum Prices Fluctuate in Box, Supported by Supply Side Reform
The most active SHFE aluminum and spot aluminum prices in China both traded mainly between 13,500-14,000 yuan/tonne in H1 2017, supported by supply side reform. Aluminum full costs averaged 13,250 yuan/tonne in H1 2017, SMM data showed.
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As for supply side reform, the government has called an immediate halt to illegal aluminum capacity already existed and under construction, but at the same time allows commissioning and restarts of legal capacity. Moreover, illegal projects under operation that meet certain requirements could be filed in accordance with regulations.
Environmental Production Issue Hurts Aluminum Consumption? Not True
SMM survey found about 110 small aluminum extrusion producers in Shandong, Hebei and Guangbei shut down in May amid environmental production checks, affecting some 200 million tonnes of capacity.
This allowed orders to flow from small producers to medium and large ones. Most small producers mainly use aluminum scrap, aluminum compound ingot and non-standard aluminum billet and small amounts of primary aluminum ingots as raw materials. By contrast, medium and large producers usually purchase primary aluminum ingots, aluminum liquid and aluminum billet. As such, the shift in orders boosted demand for primary aluminum, SMM explained.
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Aluminum Semis Exports Not Strong, Despite Favorable SHFE/LME Aluminum Price Ratio
Despite favorable SHFE/LME aluminum price ratio in H1 2017, aluminum semis exports did not post notable growth.
Customs data showed China’s exports of aluminum plate/sheet and strip rose 17.7% year-on-year in March, but exports of aluminum bar, rod and extrusion tumbled 36.23% year-on-year. Similarly, exports of aluminum plate/sheet and strip jumped 40.5% year-on-year in April, but exports of aluminum extrusion plunged 37.91% year-on-year. SMM attributes the decline in extrusion exports to intensified anti-dumping measures.
Outlook for End-Use Consumption Still Optimistic
In construction sector, average aluminum use per square meter of aluminum alloy windows and doors has increased from 6kg in previous years to current 9 kg.
In transportation sector, most of the nearly 20 carmakers surveyed by SMM still prefer high-strength steel over aluminum for now for cost considerations. However, aluminum use in passenger vehicles will see a small peak by 2019 as China will require all light vehicles to adhere to tougher new "China VI" emission standards by 2020. Aluminum use in other vehicles will also increase to reduce weight following new transport regulations and for safety concern.
To sum up, SMM is optimistic over supply side reform and aluminum consumption. However, there is still room to fall for aluminum prices since supply glut is unlikely to reverse anytime soon, unless fresh positive news pops up.
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