At the beginning of 2017, aluminum performed an outstanding result. SHFE broke RMB14000 on January 25th and LME Aluminum was at an 18-month high of USD1839 in the same week.
Last November, China’s aluminum price performed very strongly, driven by the impact of the speculative fund, environmental control and transportation policies. At that time, the LME price had the similar trend to China’s aluminum price, but LME growth was rather more modest. The arbitrage window opened last November and China’s primary import volume surged at the end of last year. Chinese traders reported seeing Indian, Middle Eastern and Australian metal in the domestic China market.
Although China’s aluminum price started correcting itself early December, it rebounded at the end of December. The aluminum price has performed even stronger since the second week in January. Although most of China’s aluminum processing factories have closed for the Chinese New Year holidays and metal consumption has dropped, the aluminum price had a big rally. A draft order calling for a 30% cut in metal capacity in provinces such as Henan and Shandong caused some traders to deploy the “Fear, Uncertainty and Doubt Factor” and push the future price higher.
In the meantime, the physical inventory increased 49.6Kt in two weeks. We expect to see the aluminum price will drop in February.
In March and April, when downstream factories reopen after holidays, aluminum demand will increase. The high raw material costs will also offer some support on aluminum price in first half 2016.
The surged LME price was mainly stimulated by the declining U.S. dollar after Donald Trump said it was too strong. The speculation funds flew to the commodity market.
The LME price was so high and the spread between LME and Changjiang had widened. The arbitrage window opened last December, but in the opposite direction compared to November. The spread between Changjiang and LME 3 month widened with average USD187 and it reached USD227 on January 10th. The opened arbitrage will be more beneficial for the semi exports.
Since LME was stimulated by the speculative funds, we expect it will remain strong under current Donald Trump’s revival of the United States view. In the meantime, with supply and demand remaining balanced outside China, our view is that the LME might reach the ceiling of USD1900, but it will meet the challenge to break it. Under the uncertainty of Donald Trump’s policy and international economy, LME will remain volatile in first half of 2017.
In the meantime, the LME and China’s aluminum price will affect each other and traders can always find its profits margin from the spread between these two prices.
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Comments
Insightful as always. The proposal from Ministry of Environmental Protection about closure of capacities — 11mnte in Aluminium and 28mnte in Alumina — how seriously one should look into it.
Very good question. We think there are political dimensions to the draft ruling that have to be taken into account. So far the speculators have made more of the proposal than the producers, but there are reasons for that on both sides.