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China’s Aluminium Market Currently Looking “Tight”: Macquarie

As the world’s largest producer of aluminium, and with slower-than-anticipated ingot inventory build and stronger prices, China’s aluminium market is currently looking “tight” report Macquarie analysts. Lynn Zhao and colleagues in their March 29 piece titled: “Ali strength in China unlikely to last” don’t envisage strength in alumina prices to last much longer.

Aluminium inventory in China hasn’t risen much

Last December, China’s aluminium smelters pledged to put a hold on starting new mills and keep idled capacity closed after prices slumped to the lowest in six years. The country now accounts for over half of the world’s aluminium production and its debt-laden smelters’ ability to continue producing is the main factor in when the global supply glut will tighten.

Zhao and team point out that China’s aluminium ingot inventory in major cities was lower than it has been in most recent years during the same season despite having comparatively higher inventory over the second half of last year. They reckon the aluminium inventory in China failed to rise by as much as over the same period in previous years due to limited new capacity addition and slow restarts of previously idled capacity so far this year.

Tracking base metal price movements, the Macquarie analysts point out that YTD base metal prices have witnessed some unusual divergence between LME and SHFE, particularly aluminium. Highlighting the divergence, the analysts point out that while the LME aluminium price has dropped 2.2%, the SHFE prices have risen by 3.6%. The analysts attribute the rise in the SHFE price largely to market sentiment towards a “temporary supply shortage” in China, supported by lower-than-anticipated inventory building since the Chinese New Year holiday.

Aluminium prices benefited from Alumina price increase

Aluminium prices climbed from a low in November on the Shanghai Futures Exchange as Chinese policy makers signalled their willingness to bolster growth. After the price rally, aluminium smelters in China, which supply over half the world’s metal’ are restarting idled plants. China Hongquiao, the world’s largest aluminium producer by capacity said it planned to enhance capacity to 6 million tonnes by the end of 2016.

According to the Macquarie analysts, many Chinese smelters didn’t anticipate that the domestic price would have such a clear rebound since December, and their significant cash losses over 2H15 have made their liquidity situation generally very tight. The analysts anticipate a strong temptation for production will restart at currently idled assets, given that the majority of smelters would be profitable at today’s prices, including Chinese smelters, even after accounting for restart costs.

Zhao and team point out that the strong rise in alumina prices supported China’s domestic aluminium price. They add that alumina prices increased 18.2% from the start of the year, which greatly outpaced the aluminium price rise.

The Macquarie analysts point out that the time lag in refinery production cuts led to a strong rebound in alumina prices YTD, and they believe the aluminium price also benefited from the alumina price increase, thanks to market perceptions of raw material tightness and cost support.