Outlook for aluminum prices this week

Last week, the price of aluminum pulled back from recent highs. Influenced by Xinjiang’s statistics of illegal production capacity and Chinese Hongqiao’s announcement of cutting 250,000 tons of aluminum production, aluminum prices were up sharply at the beginning of the week, with the main aluminum futures contracts surpassing 14000 Yuan/ton. But then a large number of investment institutions dropped funds and triggered a break. Aluminum prices plunged. Currently overall price operated above the moving average of the last 20 days. LME aluminum prices form a strong support in the vicinity of US dollars 1860/ton, putting the LME stronger than the domestic China price.

As shown below, inventory of the five major domestic spot market is up through last week. In addition, production at some aluminum companies will increase.

Units：kt

Demand side: Last week, the overall market demand was in deviation. Affected by the repeated sharp fluctuations of aluminum price, processing plants are tangled up in the market gyrations. They are buying metal based on real demand, but are not sure whether the price will go down because of over-supply or up because of cuts to illegal capacity. At present, only large processing plants with more than 100,000 tons of production are relatively stable; processing plants below 100,000 tons have varying degrees of reduced production lines. The overall consumption is not optimistic.

Cost side: this week the alumina prices is basically stable, but the price of pre-baked anode rose slightly. According to my estimates the spot cost of aluminum has reached 13437 yuan/t. Profit space has been further narrowed, but costs are providing further support to the market price.

News: Xinjiang Development and Reform Commission (NDRC) published ” Printing and issuing the autonomous region notice of the special supervision plan for the cleaning and reorganization of the Illegal project of electrolytic aluminum industry”. It’s a long title, but the scope is mainly illegal electrolytic aluminum projects constructed after May 2013. China Hongqiao announced to cut production of 250,000t and so far has cut 100,000t. The National People’s Congress (NPC) officially approved the environmental protection law and will implement it on January 1, 2018. The international market is relatively flat, CME crude index fell sharply, further testing US$40/barrel position.

Taken together, the current market news is positive for price overall. The next milestone for dealing with illegal capacity is closing soon, and we expect to see a flurry of activity in the next few days. The overall consumption is still moderating and inventory is still increasing, so any cuts to capacity would have to be substantial to change the balance.

In the short term ,the aluminum price may be expected to rise affected by news, but weak fundamentals will drag strength from the price. The main aluminum futures contract of SHFE will run weakly at 13500-14000 yuan/ton. LME aluminum performance may be stronger than China aluminum prices, is expected to peak at $1900/ton.