China aluminium prices - where’s the cliff edge?

China’s aluminium prices rose last week, buoyed by an apparent shortage of inventory.

Shanghai got to RMB12,590 on Friday, after starting the week at RMB12,375. Traders and insiders reported that the primary reason for the boost to prices has been a shortage of inventory. It’s getting to the point now that speculators who have some aluminium are holding them back, hoping to force a further price rise.

This morning the ShFE July contract was touching RMB13,000.

The problem is, real demand is not as strong as these numbers imply. The shortage of aluminium inventory is being caused by so many smelters now converting to liquid metal transfers - which in turn means they are NOT making 25kg P1020 ingots. To give one example, Fujian’s Nanping smelter restarted 40 pots in May, with 100% of the new metal being sold in liquid form.

On the other side of the ledger, physical demand is not all that lustrous. We have been doing a sweep of many downstream factories in the last 2 weeks, and overwhelmingly the answer we are getting is that factories are not seeing any uptick in orders.

With more aluminium coming in the form of additional restarts plus construction of new potlines now being completed in a couple of cases, there is plenty of supply. It’s just not in a form that Shanghai marks as its primary metal unit.

There’s two outcomes from this situation. The more likely and more immediate one is that prices fall off a cliff. That price point of RMB13,000 is an important barrier which got tested a couple months ago. It is being tested again now, but the fundamentals simply don’t supply a break-above.

We expect prices to retreat through July.

Longer term, the real issue becomes, what is the new role for ShFE and what role do the physical markets play? Some insiders in China’s aluminium industry are telling us that as much as 75% of China’s aluminium production is now leaving smelters in crucibles (in liquid form). Subtract other metal sold to inter-company downstream factories and other metal that is not available to the open market, it could be that as little as 5%-10% of China’s total primary metal production is actually being presented to the markets.

All that aluminium moving around in crucibles still needs a price discovery mechanism for the sales contracts. But the prices are now being established based on faulty market fundamentals, with so little metal being offered. The question of what happens longer term is a topic we will be discussing in this month’s World aluminium Monthly.