Singapore 28/03/2016 - Chinese aluminium prices have continued its upward trajectory over the past fortnight and this could prompt more Chinese smelters to restart idled production capacity.
But despite so, Chinese aluminium supply will remain tight in the first half of this year, said Chinese analysts.
The Shanghai Futures Exchange May aluminium contract price had closed at 11,740 yuan per tonne on Monday – up 40 yuan from Friday’s close - after reaching a six-month high of 11,830 yuan earlier in the day.
The SHFE aluminium price has recovered from an all-time low of 9,555 yuan in late-November following production cuts and stoppages in China since the second half of last year.
Industry watchers have been watching for more restarts after domestic aluminium prices hit 11,500 yuan – a price level most deemed “reasonable” for smelters to resume operations.
After the recent strength and tightening supply in the domestic market, some analysts have lifted their outlook for Chinese aluminium prices projecting that prices will reach 12,000 yuan soon.
“We think Chinese aluminium prices could even reach 12,500-13,000 yuan per tonne by May or June,” said a Beijing-based metals analyst.
China’s largest aluminium producer China Hongqiao Group had also said earlier this month that it could lift its aluminium smelting capacity by 15 percent to six million tonnes per year by end-2016 if domestic prices are sustainable at 11,000-12,000 yuan for a period of time.
But market participants said they are not overly worried about the restarts and start-up of new capacity in the first half of this year.
“There are still limited restarts at the moment because smelters are waiting for prices to stabilise for a period of time. Smelters need to be confident that prices are supported before they would commit to restarting operations,” said the Beijing analyst.
Chinese analysts estimate that between early-January and early-March, capacity that has already been or is planned to be restarted alongside new start-ups amount to around 500,000 tonnes per year.
But they forecast that actual restarts and new capacity start-ups in the first half of the year will likely be around one million tonnes per year – a figure they said will be insufficient to meet demand especially during the Chinese peak demand period of April-May.
Smelters that have just begun restarting idled facilities will also need a month or two before producing metal, which will also be too late to meet the peak period demand, they added.
“Those who restart in May or June will only be able to produce metal around July or August,” said a Shanghai-based aluminium analyst.
“Even if Chinese aluminium price rises to 12,000 yuan, we don’t see new capacity and restarts exceeding one million tonnes per year in the first half.”
PRICE PRESSURE IN H2
But after the first half, Chinese aluminium prices could come under pressure due to the increase in production and slow demand in summer, analysts agreed.
“Supply will be tight in the first half and there could be a deficit in the Chinese market during April-June, but there definitely won’t be a deficit for the whole year,” said a second Shanghai-based aluminium analyst.
While aluminium prices may hit 12,000 yuan in the near-term, production restarts and new capacity start-ups will keep a lid on prices or even send prices lower in the second half of the year, she said.
Analysts also pointed out that global aluminium price will play a part in determining Chinese smelter restarts as well.
Stronger global aluminium prices will entice Chinese aluminium fabricators to export more, hence boosting the demand at Chinese smelters, added the analyst.
Earlier this month, Macquarie Commodities Research noted that the aluminium price of above $1,500 will increase the potential for restarts of idled production.
"Rather than further cuts, we foresee a strong temptation for production to restart at current idled assets - most notably in China. History has shown Chinese producers to be very reactive to price and any mirage of cartel discipline quickly disappears when there is money to be made," it said.
From a supply-demand perspective, the bank expects a roughly balanced market this year but only if the currently idled Chinese capacity remains off line.
"LME aluminium prices should remain at a level which keeps capacity idled - in our view around $1,400 for the foreseeable future," it added.
The London Metal Exchange three-month aluminium price had closed at $1,475.50 per tonne last Thursday. There is no trading on the LME last Friday and on Monday due to Easter holidays in the United Kingdom.
(Additional reporting by Kathleen Retourne)