Singapore 30/05/2016 - Shanghai Futures Exchange aluminium contracts are seeing support from falling domestic inventory levels but downside pressure is mounting as demand is expected to slow while supply is expected to rise in the near-term, said market participants.
SHFE aluminium had been in an uptrend since late-November when it hit an all-time low of 9,555 yuan per tonne. It had risen to touch a 10.5-month high of 13,075 yuan per tonne on April 22 but has since eased. The SHFE July contract closed at 12,295 yuan on Monday, up 75 yuan from Friday’s close.
Aluminium stocks in SHFE warehouses have been falling consistently for around two months. Inventories have fallen 27.8 percent or 94,988 tonnes since the week of March 21 to 246,627 tonnes last week, reflecting tightness in the domestic market following production cuts among Chinese smelters since last year.
In China’s five major markets –Shanghai, Wuxi, Hangzhou, Gongyi and Nanhai – aluminium stocks have fallen to 457,000 tonnes as at May 26 – down around 51 percent from the first half-half peak of 928,000 tonnes in the week of March 14, according to Shanghai Metals Market’s (SMM) survey.
The declining inventory is providing support for SHFE aluminium prices but this could change from the second half of June or from July onwards, analysts said.
“The turnaround point for the stock decline is likely to be in late June, if not, then July,” Liu Xiaolei, an aluminium analyst at SMM told FastMarkets.
Downward pressure on SHFE aluminium will also come on more production restarts, start-up of new capacities and slower demand during the summer period, said Liu.
SMM is forecasting SHFE aluminium to fluctuate at 12,000-12,500 yuan in the coming 2-4 weeks - with support from market fundamentals at 12,000 yuan and huge selling pressures at 12,500 yuan - but a downtrend could be instore thereafter.
Aluminium stocks could start rising in July after falling below 400,000 tonnes by end-June, said Minmtals & Jingyi Futures in a Friday report.
“We are not optimistic about SHFE aluminium returning to near 13,000 yuan due to the gradual increase in supply and slower demand,” the futures brokerage said.
Bearish factors for SHFE aluminium are increasing, said Maike Futures in a report earlier this month.
New capacity start-ups and production restarts are gradually increasing - substantial capacity restarts are expected in Gansu, Jiangxi and Guizhou in June – while demand is slowing with the upcoming off-peak period for consumption, it said.
“There is a lack of longs entering the market. It will be difficult for SHFE aluminium to hit a new high,” it added.
But state-owned research firm Beijing Antaike said Chinese aluminium supply will remain low for the most of this year despite the restart of idled capacity and new capacity start-ups.
It estimates as at end-May, around 500,000 tonnes per year of previously idled aluminium smelting capacity has restarted while new capacity start-ups amounted to 900,000 tonnes per year.
Around 1.5 million tonnes per year of new capacity will be commissioned in the second half of the year, with most of the commissioning being concentrated in the fourth quarter.
The restarts and new start-ups will not be able to make up for the over four million tonnes per year of production stoppages from last year, it said.
The pace of production restarts have not been as fast as expected as they are being checked by tight credit, rising production costs and increased market volatility, market participants said earlier this month.