Since mid-June, dragged down by weak consumption, Shanghai aluminum has fallen from a high to 17,025 yuan / ton, a drop of 20% in one month. Recently, driven by the recovery of market sentiment, aluminum prices rebounded slightly, but the current weak fundamentals of the aluminum market have limited boost to prices. Therefore, it is more likely that the aluminum price will run against the cost price oscillation in the third quarter, and the aluminum price may have a directional choice in the fourth quarter. If a strong consumption-stimulating policy is introduced, in line with the news of production cuts on the supply side, the probability of aluminum prices rising is high. In addition, since the Fed is expected to raise interest rates, the macro negative factors will lead to the downward movement of the aluminum price center throughout the year, and the rebound height in the market outlook should not be too optimistic.
Supply growth continues unabated
On the supply side, as Shanghai Aluminum has fallen to the cost line, the average profit of the entire industry has dropped from a high of 5,700 yuan/ton during the year to the current loss of 500 yuan/ton, and the peak of production capacity growth has passed. However, in the past two years, the average production profit of electrolytic aluminum has been as high as 3,000 yuan/ton, and the profit per ton of aluminum is still relatively generous after the loss of ton of aluminum is evenly amortized by the previous profit. In addition, the cost of restarting the electrolytic cell is as high as 2,000 yuan/ton. Continued production is still a better option than the high restart costs. Therefore, short-term losses will not immediately cause aluminum plants to stop production or reduce production capacity, and supply pressure will still exist.
As early as the end of June, the domestic electrolytic aluminum operating capacity has increased to 41 million tons. The author believes that with the resumption of production and the gradual release of new production capacity in Guangxi, Yunnan and Inner Mongolia, the operating capacity will reach 41.4 million tons by the end of July. And the current national electrolytic aluminum operating rate is about 92.1%, a record high. The increase in production capacity will also be further reflected in the output. In June, my country’s electrolytic aluminum production was 3.361 million tons, an increase of 4.48% year-on-year. It is expected that driven by the high operating rate, the growth rate of electrolytic aluminum production in the third quarter will continue to grow steadily. In addition, since the escalation of the Russian-Ukrainian conflict, about 25,000-30,000 tons of Rusal has been imported per month, which has led to an increase in the number of spot goods circulating in the market, which has suppressed the demand side, and then suppressed aluminum prices.
Waiting for the recovery of domestic terminal demand
On the demand side, the current focus is on whether the strong recovery of terminal demand under the background of stable domestic growth can be fulfilled and the timing of fulfillment. Compared with domestic demand, the increase in aluminum export orders in the first half of the year was the main driving force for aluminum ingot consumption. However, after excluding the impact of exchange rates, the Shanghai-London aluminum ratio returned. With the rapid decline in export profits, it is expected that the subsequent export growth will be weak.
In contrast to domestic demand, the downstream market is more active in picking up goods, and the spot discount has narrowed, resulting in a continuous decline in inventory levels in the past two and a half weeks, and shipments have increased in anti-season. From the perspective of terminal demand, the current real estate sector is expected to improve, while the auto market, which should have entered the off-season, has recovered to a large extent. In the automobile market, data show that the output in June was 2.499 million, an increase of 29.75% month-on-month and a year-on-year increase of 28.2%. The overall prosperity of the industry is relatively high. On the whole, the slow recovery of domestic demand may be able to hedge against the contraction of aluminum exports, but the implementation of the current real estate industry policy still takes time, and the stabilization and repair of the aluminum market is waiting to be realized.
On the whole, the current aluminum market rebound is mainly caused by market sentiment, and there is no reversal signal at present. At present, the fundamentals are still in a state of contradiction between supply and demand. The reduction of production on the supply side needs to see the continued squeeze of profits, and the recovery on the demand side needs to wait for the release of favorable policies and the substantial improvement of data in the terminal field. There is still hope for a strong boost to the real estate sector, but under the negative effect of the Fed’s interest rate hike, the rebound of Shanghai aluminium profile suppliers will be limited.
Post time: Aug-03-2022
