Aluminium price teetering on the edge

It is looking like the RMB10,000 barrier will be broken today. The China aluminium price is teetering on the edge, with Shanghai cash sitting at RMB9,950 and Changjiang at RMB9,960. That puts it at US$1,570 including VAT, or US$1,340 on a straight comparison with the LME. However, the SHFE price is still sitting a little above the line, opening this morning at RMB10,180.

While the falling price has found some lines of support under RMB10,500, this slip in price has come despite another 5 smelters cutting capacity. That’s probably because the 5 smelters together represent only about 390,000t in cuts, and one of those smelters is presently building new cells that it will bring on stream mid next year.

The stuttering aluminium price is not helped by a generally soft sentiment about the macro economy, and data points that continue to deliver less than rosy indications. International trade, CPI, PMI, IP and a host of other indicators keep reminding players that things are not great, despite the hype about “singles day” in China last week. The market is looking over-sold right now - with such low prices, and with forward prices giving no sign of a turnaround, we think more capacity will be cut soon. “Soon” can be defined as any time between now and next March, but the macro economic conditions, the environmental pressures, the cuts in the steel industry and other indicators point to a likely correction in metal capacity by the end of Q1 2016.

Meantime, the low China aluminium price will drag on the LME, not that the LME is showing any signs of lifting off right now. The last LME aluminium price I saw was US$1,467, but the problem is that the spread between this price loaded with a delivery premium, and an ex-VAT Shanghai price delivered to nearby ports leaves a small margin for Chinese exporters. There’s profit to be made by exporting metal, and now that the linkages and markets are established, it’s easier for those exporters to do exactly that. Hence the LME price will remain tethered to the China aluminium price.

Thanks to SCMP for the feature image.