Aluminum price rise short-lived?

Since the start of 2017, China’s aluminum price has shown the down trend of “V-type”. Factories started holidays well before Spring Festival, but the delivery of spot aluminum ingots has been tight, thanks to coal taking priority on rail. Stocks did not have a large rise despite downstream demand softness, while a large amount of floating capital boosted the aluminum price, and even the dominant contract touched RMB14140/ton on Jan. 25th, and it appears “flourishing in slack season”.

While the transportation of the aluminum ingots in north-west ushered in the golden period during Spring Festival: the daily delivery in Xinjiang comes up to 460 train sets, and Gansu, Qinghai, etc take their initiative to ship the goods. Except around 275KT in Sinkiang aluminum factories, the factories in other districts have shipped out their inventory, and that leads the spot market stocks up to 163.8KT. The specific inventory data is as follows:

                                                                  Unit: KT

Date Shanghai South China Sea Wuxi Hangzhou Gongyi Sinkiang SUM
2017-1-26 123 103 169 44 63 311 813
2017-2-3 173 119.5 238 57.3 94 295 976.8
2017-2-8 186 132.5 250 73 110.5 275 1027

The large increase of spot stocks leads directly to the plummet of aluminum price. Until Feb 7th, the offer in the main futures contracts was as low as RMB13520/ton, a RMB620/ton drop compared with the high prices before the Spring Festival and the range of price drop up to 4.38%.nInfluenced by the arbitrage space in price difference between futures and spot and the supply-side structural reform of electrolytic aluminum industry posted by government, the aluminum price rebounded on Feb. 8th.  Changjiang spot price had a large rise of RMB250/ton, narrowing the price gap between the futures and spot, but in consideration that most downstream processing factories will come into operation after Lantern Festival, the aluminum price may be impacted by slack demand.

The inventory of aluminum ingots rises after the Spring Festival, and we can perceive it as a catch-up from the quiet period ahead of and during the holidays.  But the price gap between the futures and spot is as high as RMB150/ton, so the arbitrage space still exists. It is anticipated that the delivery volume of futures contracts will have a large rise, and the pressure of aluminum ingots supply will further increase at that time. The supply and demand of aluminum market will be faced with a tough situation in the first quarter, and the price of short futures may seize this chance to rise. Although the government posted that they will have a supply-side structural reform of electrolytic aluminum industry, Zhang Bo, CEO of China Hongqiao, which is the largest electrolytic aluminum enterprise in the world, said “Excessive electrolytic aluminum is an pseudo-proposition”. The government apparently wants to take a tight control of the capacity of electrolytic aluminum, but the capacity continues to grow, and will do again this year, even if not at the pace of previous years.

The market should be vigilant to the price fall from the peak.