Singapore 16/05/2016 - Market participants have over the past few months anticipated more restarts of idled Chinese aluminium smelting capacity given the rebound in aluminium prices this year.
But tight credit, rising production costs and increased market volatility are checking the pace of restarts, sources said.
"The Shanghai Futures Exchange aluminium price has seen some support over the past few days because there is word in the market that many smelters are unable able to restart production due to funding problems," an analyst with a Beijing-based futures brokerage said.
While SHFE copper has largely been trending lower over the past three weeks, SHFE aluminium has managed to stem its decline from late-April to hold above 11,855 yuan since Tuesday. The July contract closed 155 yuan higher at 12,225 yuan per tonne on Monday.
Chinese aluminium smelters are finding it difficult to get credit facilities from banks, a Shanghai-based aluminium analyst agreed.
"Funds remain tight for many smelters. Banks have become disappointed with this industry since last year and it remains hard for smelters to get new credit this year," he said.
Smelters are also facing higher production costs - alumina and coal prices have risen alongside aluminium prices, industry watchers said.
In certain Chinese northwest provinces, power rates have not fallen as expected while some local governments have cancelled or cut their power subsidies for smelters, they noted.
Smelters are also waiting for a sustained increase in aluminium prices before committing to restarts, sources added.
SHFE aluminium prices turned volatile late last month when funds switched to aluminium contracts from rebar after the exchange announced measures to curb frantic speculation in the latter.
The most active SHFE aluminium price surged to a near-10-month high of 13,075 yuan before dipping to a one-month low of 11,775 yuan on Monday last week.
"Many smelters are in a wait-and-see stage," an analyst with a Shanghai-based futures brokerage said. "On the whole, we are not expecting many capacity restarts this quarter."
More than 200,000 tonnes per year of previously idled aluminium smelting capacity in China restarted in January-April this year, Chinese metals research firm Shanghai Metals Market estimates. If new capacity start-ups are included, more than one million tonnes per year of restarted and new capacity was introduced in the first four months of the year.
Chinese electrolytic aluminium production fell 1.2 percent year-on-year and 1.9 percent month-on-month to 2.57 million tonnes in April, the latest data from China's National Bureau of Statistics also showed. In January-April, Chinese aluminium production totalled 9.94 million tonnes, down 1.7 percent from the same period of last year.
In an aluminium conference last week, Ao Hong, the president of Aluminium Corp of China (Chalco), told reporters that Chalco does not plan to restart 500,000-600,000 tonnes per year of capacity it had shuttered and that it will maintain its output below 3.3 million tonnes this year.
SHFE aluminium prices should continue to find support from last year's production cuts of around five million tonnes but price volatility will persist in the near term, market participants said.
"SHFE aluminium could rise further but it will be difficult for prices to remain above 13,000 yuan," the third analyst said.
(Editing by Mark Shaw)