Speculators have moved into the neighbourhood

On the first day back from China’s National holidays, the aluminium SHFE price gave people a big surprise. The SHFE active price closed at RMB12,865, an increase of RMB400 compared to the last day in September. The big spread between Changjiang and SHFE future active price narrowed from RMB1015 before the holidays to RMB615 on the first Monday after holidays.

Based on our research, the current SHFE price rally was caused by speculators. After checking with a few smelters, we got the news that the hedge funds before holidays began transferring to speculative funds on the first trading day after holidays. That was the major reason caused the aluminium price up

We noticed that demand did not increase much after holidays. The trade in Shanghai, Wuxi and other areas started to discount the deals. Since the future price was not supported by demand, it is not surprising to see the future price was boosted by speculators.

On 8^th of October, Premier Li Keqiang held the State Council Executive Meeting. The meeting mentioned clearly that no applications will be approved on adding the capacity in the over-capacity industries including iron, coal and the aluminium. This news supported the aluminium price and attracted the speculators.

Now the speculators have moved into the neighbourhood, what will happen to the physical price?

Although the speculators were very active in the future market, the physical price remained stable. Since the Changjiang price already reached the 2016 high before the holidays, it has not been influenced much by the future price yet.

Inventory increased only 41kt after holidays. It still runs at low levels. This supported price action.

The impact of the new transportation policy still influences the delivery of metal. The Guangdong inventory could hardly be moved out due to the transportation issue. The trucks in Xinjiang are busy on delivering the cotton and it influenced the ingots delivery from Xinjiang. However we now understand that the trucking impasse has been resolved in favour of the trucking companies. They have forced through the extra costs for complying with the new regulations, and the aluminium companies are passing these higher costs on to their customers.

Based on the above analysis, the AZ China team believes the aluminium price is “walking the plank”. While speculators continue to pour money into this metal and other commodities, the price will be supported. But we worry that the price action will only encourage more smelters to restart. Since demand is not all that strong, we are soon going to enter into a period of serious over-supply. The first to leave the action will be the speculators, but smelters who have just restarted idled capacity are likely to be the last to leave.

The conditions are now being set up for a serious price fall, possibly back to as low as RMB10,000. It took this price level to convince producers to exit last year. The unknown in all of this however, is what will the “big 6” do? The big 6 smelters who announced a plan to support the price will no doubt be fighting a defensive action within a few months.