London 09/06/2016 - Shanghai Futures Exchange (SHFE) aluminium has been backwardated since late-April but is expected move back into a contango as soon as June when new supply comes onto the market.
Earlier this year, SHFE was in a constant contango due to market oversupply but that changed in April when production cuts among Chinese smelters tightened domestic supply and reduced inventories.
“The backwardation for SHFE aluminium reflects the imbalance between demand and supply in the market,” said an analyst with Beijing-based futures brokerage.
The backwardated spreads between the June SHFE contract and most active August contract widened - moving above 300 yuan per tonne in late-May and reaching as high as 485 yuan on Tuesday. But the spread eased to 385 yuan per tonne on Wednesday. SHFE is closed for the Dragon Boat Festival in China today and Friday.
SHFE aluminium has been in an uptrend after falling to an all-time low of 9,555 yuan in late November. But after hitting a 10.5-month high of 13,075 yuan in late-April, prices started trending downwards. The August contract closed at 11,870 yuan on Wednesday, up 215 yuan from Tuesday.
“Most traders are not optimistic about aluminium going forward and prices are weakening now,” said a Shanghai-based metals analyst.
But expectations are for spreads to narrow before moving into contango in the near-term.
Supply tightness in the domestic spot market is expected to ease later in June as more Chinese aluminium producers restart idled capacity, new capacity is commissioned and demand slows during the summer period, industry watchers said.
China’s electrolytic aluminium production was down 1.1 percent year-on-year in May but up 4.7 percent month-on-month to 2.61 million tonnes, according to data tabulated by Shanghai Metals Market (SMM).
While SMM forecasts Chinese June aluminium output of 2.548 million tonnes in June, down 2.4 percent from May, it noted in its Wednesday report that some 300,000 tonnes per year of new Chinese aluminium smelting capacity is expected to be added into the market in June.
“The backwardation in SHFE aluminium is abnormal but how soon it will return to normal depends on what’s going to happen to supply in the spot market,” noted a Shanghai-based futures trader.
While some smelters have restart idled capacity, others are also said to be holding back on restarts on expectations of weaker aluminium prices going forward, high production costs and tight credit, sources said.
(Editing by Tom Jennemann)