High Inventory and Costs Weighed on Aluminium Prices in February Despite Low Domestic Operating Capacity

On the supply side, domestic refined aluminium operating capacity fell further in January, mainly due to Guizhou scaling up its output cuts to 760,000 mt as well as slow production resumption and commissioning of new production in other regions. Domestic operating capacity decreased by 135,000 mt month-on-month to around 40.295 million mt. In January, the refined aluminium output fell by 0.47% month-on-month to 3.418 million mt. In February, market speculations over output cuts in Yunnan arose again. Although it has not been implemented yet, the low reservoir level in the province and the adverse hydropower supply situation are likely to cause a 10-20% output cut in the short term. The resumption of the reduced capacity in Guizhou and other regions has been slow and, the production resumption will pivot on future power supply. In February, domestic operating production capacity will lack ability to increase.

The cost of refined aluminium in China has shown a downward trend since December mainly due to two reasons. ① Power costs at refined aluminium smelters with captive power plants slid amid a weak coal market. Currently, power cost at leading aluminium plants in Shandong fell 0.15 yuan/kWh from the highest in November. Electricity prices for other aluminium smelters changed little. The cost for some power plants that purchased coal under long-term contracts was stable. The average cost of electricity in the domestic refined aluminium industry has not followed the sharp drop in coal prices, and remains at around 0.44 yuan/kWh. ②The price of prebaked anodes continued to tumble, and the cumulative price decline exceeded 1,000 yuan/mt from January to February, which drove the cost of refined aluminium down. Based on the current average data, SMM predicts that the full average cost of domestic refined aluminium in February will drop by nearly 850 yuan/mt to 16,690 yuan/mt compared with the cost in December.

In January, the traditional off-season and CNY holidays weakened downstream consumption. Meanwhile, poor overseas demand caused aluminium semis exports to fall year-on-year. The domestic aluminium social inventory accumulated in January and the accumulation rate after CNY holidays far exceeded the level of the same period last year. That dragged down SHFE aluminium prices to a certain extent.

The most active SHFE aluminium contract is expected to hover at lows before rebounding between February 11, 2023 and March 11.