SMM Aluminium Faces Pressure from Macro Headwinds

SHANGHAI, Feb 16 (SMM) - Macro: (1) US retail sales rose 3% month-on-month in January, the largest increase in nearly two years, far exceeding market expectations for an increase of 1.8%. US core retail sales rose 2.3% month-on-month in January, also far exceeding market expectations. This indicates that inflationary pressures are rising, and the market believes that the probability of the Fed raising interest rates by 50 basis points has increased.

(2) The International Energy Agency (IEA) raised its global oil demand forecast for this year on Wednesday, saying that after China optimizes its epidemic prevention policies, it will significantly boost oil demand this year. Global oil demand is expected to grow by 2 million bpd to 101.9 million bpd in 2023. But with demand recovering and some Russian output constrained, the supply-demand dynamic could quickly turn into an imbalance.

Fundamentals: (1) According to SMM data, the weighted full average cost of the domestic aluminium smelters in January 2023 was about 17,200 yuan/mt, a month-on-month decrease of 1.9% and a year-on-year increase of 8.3%. In January 2023, the average spot price of SMM A00 aluminium was recorded at 18,334 yuan/mt, and the average industry profit in January decreased by 333 yuan/mt to 1,137 yuan/mt compared with December.

(2) On February 11, the groundbreaking ceremony for the 6 million mt/year alumina project in was held in Gansu province. After the project is completed, Jiayuguan City will add 18 billion yuan in industrial output value and 700 million yuan in tax revenue, forming a complete aluminium industry system of "alumina- aluminium-aluminium semis-deep processing of aluminium products".

(3) In February, there is still a power shortage in Yunnan Province, and the local power load is expected to drop by 1 million kilowatts, which is equivalent to about 650,000 mt decline in aluminium production capacity.

Summary

Macro headwinds weighed on base metals. On the fundamentals, the long-awaited output reduction has not been enforced. And the social inventory has kept rising. The market is waiting to see when the demand will show strong recovery. It is expected that aluminium prices will remain rangebound in the short term.