Aluminium Prices Boosted by Power Cuts, Peak Season and Easing Inventory Pressure

SHANGHAI, Feb 21 (SMM) - The production cut in Yunnan became the headline news in the aluminium market this week.

On the evening of last Friday (February 17), SMM learned from some aluminium smelters in Yunnan that they have already prepared for the production cut. 

According to the latest SMM research on Monday, the production reduction in Yunnan may exceed the previous forecast. It is estimated that about 700,000-800,000 mt of aluminium production capacity in Yunnan will be involved.

After the production restriction in September 2022, the current operating capacity of in Yunnan is 4.04 million mt. The second round of production cuts began last weekend, and will be fully in place within 10 days. Therefore, the operating capacity in Yunnan will drop to about 3.2-3.3 million mt in February and about 39.6 million mt in March.

In recent years, through the capacity replacement and commissioning of new capacity, aluminium capacity in Yunnan has increased rapidly. According to SMM data, as of January 2023, Yunnan has built a production capacity of 5.6156 million mt, ranking the fourth after Shandong, Xinjiang and Inner Mongolia.

However, it is worth noting that, as a high-energy-consuming enterprise. The production reduction caused by the power shortage not only poses new challenges to energy supply and distribution, but also causes certain changes in the current supply and demand of the aluminium market. Moreover, the power shortage in Yunnan is unlikely to ease expected to ease before the flood season, hence the production cut will not end in the short term.

SHFE aluminium prices rose yesterday and rebounded strongly by 1.40% to 18,775 yuan/mt.

SMM A00 aluminium ingot spot price rose sharply by 230 yuan/mt from last Friday to 18,670-18,710 yuan/mt, with the average price of 18,690 yuan/mt.

SMM aluminium price in Foshan showed a discount of 65 yuan/mt over the SHFE 2303 contract, down 5 yuan/mt from the previous trading day, and the average spot price recorded 18,700 yuan/mt, up 240 yuan/mt.

Against the background of supply reduction, the demand continues to recover, hence the inventory pressure continues to ease, which will boost the aluminium prices.

The average operating rate across major aluminium processing enterprises increased 1.7 percentage point from a week ago to 61.5% as of February 16. The rising operating rates of all sectors implies the upcoming peak season.

As of February 20, aluminium ingot social inventory totalled 1.23 million mt, up 17,000 mt from last Thursday. Although the inventory still increased on the week, the growth rate slowed down.

On the macro front, SMM will focus on the minutes of the Fed’s February meeting.

As coal prices stopped falling and stabilised, the falling costs of aluminium have been eased. Coupled with the production cut and eased inventory pressure, aluminium prices may rebound. It is expected that short-term prices will remain strong. However, there are still many uncertainties. It is necessary to continue to pay attention to the impact of factors such as the rate hike process of the Federal Reserve and whether the inventory of aluminium ingots can continue to decline.