Singapore 22/04/2016 - Aluminium surged to a near-10-month high on the Shanghai Futures Exchange on Friday when funds bet on tightening supply and improving demand.
The SHFE June aluminium contract hit its trading limit to close at the day's high of 12,805 yuan per tonne on Friday, up 405 yuan on Thursday's close. A total of 548,556 lots had changed hands, with open interest at 271,754 positions after the market close - an increase from 247,488 from Thursday's close.
The sharp rise is in contrast to the other metals on the SHFE, which all closed lower due to profit-taking after this week's rallies.
"A lot of funds had switched from rebar to aluminium amid limited upside for rebar," a Shanghai-based aluminium analyst said. "The fundamentals are good for aluminium as supply is expected to tighten and demand improve in the second quarter, so funds now prefer aluminium."
Other than funds switching from rebar to aluminium, some funds and retail investors that were previously not in the metals futures market have also opened positions in SHFE aluminium, a Shandong-based metals analyst said
"These funds are looking for products whose price has already fallen substantially and which China has a say in determining its price in the global market," he said.
"[Ferrous metals meet] the criteria the most but funds are cautious about ferrous contracts as they have already risen too much. Aluminium has replaced ferrous contracts given how much its price has already fallen and its fundamentals are positive now," he added.
Other than rebar, SHFE's ferrous contracts include hot rolled coils and wire rod.
Following production cuts and stoppages in China since the second half of last year, the SHFE aluminium price has recovered from an all-time low of 9,555 yuan late in November last year. This means is has since surged 34 percent.
Some smelters have restarted or are preparing to restart idled capacity alongside new projects start-ups after the rebound in aluminium prices. Up to one million tonnes per year of smelting capacity may have already started back up in China since March, Citi Bank estimated.
But second-quarter aluminium supply will remain tight because demand will outpace the restarts, Chinese analysts maintained.
"Smelters are preparing to restart but time is needed before the smelters produce metal. We will only see production coming out of the restarts from the second half of June," a second Shanghai-based trader said.
Inventory levels in the country also continues to fall, with those in five major Chinese cities dropping around 250,000 tonnes in total over the past six weeks, the analyst estimated.
"We expect the market to continue digesting the stocks until early June," he added.
The entrance of funds on Friday gave rise to the possibility of further upside to above 13,000 yuan for SHFE aluminium in the second quarter, market observers said.
But it is difficult to forecast how much higher aluminium can go especially after its recent swift advance, the second analyst said.
"We're optimistic for the aluminium price in the short term but I don't think the increase can continue in the long term," he said.
Production restarts, new start-ups and slow summer demand are likely to keep a lid on prices in the second half of the year, analysts agreed.
(Editing by Mark Shaw)