Aluminium Prices Continue to Fall amid Supply-Demand Contradictions

SHANGHAI, Mar 10 (SMM) – Overnight, the most-traded SHFE 2204 aluminium contract opened at 21,825 yuan/mt, with the highest and lowest prices at 21,825 yuan/mt and 21,205 yuan/mt before closing at 21,300 yuan/mt, down 640 yuan/mt or 2.92%. LME aluminium opened at $3,680/mt on Wednesday and hit a high and low of $3,680/mt and $3,300/mt respectively before closing at $3,301/mt, a drop of $380/mt or 10.32%.

Macro: China's CPI rose 0.9% year-on-year and 0.6% month-on-month in February; PPI rose 8.8% year-on-year and 0.5% month-on-month. (Bullish factor ★);

The US dollar index fell below the 98 and closed down 1.178% at 97.97. The yield on the 10-year US Treasury bond continued its upward trend and finally closed at 1.967%. (Negative factor ★)

Although the Federal Reserve has not raised interest rates, the US Treasury yield curve is close to an inverted pattern, which is usually a prelude to a recession. Forward markets show traders are bracing for an inversion of the 2-year and 10-year yield curve within a year.

(Negative factor ★)

Fundamentals: Aluminium billet conversion margins across mainstream markets continued to rise yesterday and rose 50-75 yuan/mt. According to SMM data, the mainstream conversion margins of Φ90 aluminium billets in east China were 400 yuan/mt. Some traders were willing to negotiate lower margins according to the purchasing volume, but few deals were done. The mainstream conversion margins of Φ90 aluminium billets in south China were offered at 430 yuan/mt, and 400 yuan/mt for Φ120 and Φ178 billets, but downstream wait-and-see sentiment was strong, with thin trades. (Negative factor ★)

Prices of aluminium scrap continued to fall. Prices of aluminium extrusion scrap and aluminium tense scrap fell by 300 yuan/mt and 200 yuan/mt respectively. Due to the continuous sharp drop in aluminium prices, aluminium scrap recyclers refrained from selling cargoes that they purchased at higher prices a few days ago. Aluminium scrap recyclers only sold to downstream producers with long-term cooperation. (Negative factor ★)  

Spot market: After two days of sharp declines in the futures prices, the downstream consumption in east China did not improve significantly. It still takes time for end demand to recover. Spot discounts in east China were 40-60 yuan/mt. Traders who have positions in the futures market for hedging purpose sold actively in the spot market.

In summary, from the perspective of the supply side, the resumption of production at domestic aluminium smelters has accelerated. With the steady growth of domestic aluminium daily output in March, the aluminium output is expected to total 3.3 million mt, and the operating capacity in May is expected to return to the level in the same period last year. The demand side was suppressed by high aluminium prices, and the inventory remained high. After two days of sharp declines in the futures prices, the downstream consumption did not improve significantly. It still takes time for end demand to recover. On the whole, in the absence of bullish factors, the price correction is normal.