SHFE Aluminium to Sustain Gains on Production Cutbacks in Yunnan

SHANGHAI, Feb 21 (SMM) – The most-traded SHFE 2303 aluminium contract opened at 18,730 yuan/mt overnight before closing at 18,775 yuan/mt, up 220 yuan/mt or 1.18%. LME aluminium opened at $2,395/mt on Monday and closed at $2,462/mt, an increase of $72/mt or 3.01%.

Macro front

The Chinese real estate market is filled with favourable policies, which will allow the sector to recover further. The infrastructure sector will also continue to improve.  

Fundamentals

All aluminium smelters in Yunnan, except for Wenshan Aluminium, are required to curtail their installed capacity by 35%-42% in order to combat local power shortfalls. As 20% of capacity was already lost in the first round of power rationing, this round of power rationing is estimated to threaten 670,000-800,000 mt of capacity.

Domestic aluminium ingot social inventory stood at 1.23 million mt as of February 20, up 17,000 mt from last Thursday, but at a much slower pace than before.

On the other hand, domestic aluminium billet social inventory extended decline, falling 4,000 mt from last Thursday to 198,300 mt.    

On the demand side, higher prices suppressed downstream buying interest. In terms of cost, the price of coal has stabilised and the price of alumina was relatively firm, diminishing expectations for cost collapse.

To sum up, the pace and magnitude of the Federal Reserve's interest rate hikes are still important guiding factors for the trend of aluminium prices. Generally speaking, with the entry of bulls and exit of shorts, it is expected that aluminium prices will remain firm in the short term.