Singapore 28/06/2016 - The Shanghai Futures Exchange aluminium backwardation is lasting longer than expected while the spot market supply remains tight - contrary to expectations that it could ease in June.
The spot supply tightness - which saw Chinese aluminium market inventory falling for more than three months - kept SHFE aluminium in a backwardation from late in April.
Market participants had predicted that the market could return to contango in late-June on expectations that production restarts, the start-up of new capacity and slower demand would provide relief
But analysts have now largely pushed back their expectations on when the decline in market inventory will reverse and when a contango would return.
"The spot market stock decline is lasting longer than expected. We think the stock decline reversal might only come at the end of July," Liu Xiaolei, an aluminium analyst at Shanghai Metals Market (SMM) told FastMarkets. "The backwardation could last till July, even August."
Chinese aluminium inventory in five major Chinese cities - Shanghai, Wuxi, Hangzhou, Gongyi and Nanhai - was 363,000 tonnes at the end of last week, SMM estimates, which was down 43,000 tonnes from the previous week. Stocks have dropped 61 percent from the first-half peak of 928,000 tonnes in the week of March 14.
Chinese domestic aluminium inventories should drop to around 330,000 tonnes, with a reversal in the stock decline likely to come about only in August or September, Minmetals Jingyi Futures said in a report last week.
With stocks expected to continue falling in the near term, the futures brokerage is "optimistic about the Chinese aluminium supply-demand situation in the third quarter", it said.
Chinese aluminium supply in the third quarter could remain tight, Liu agreed. "The supply situation will improve in the third quarter compared to the second quarter but versus the same time last year, third quarter supply will be tighter," he said.
PRODUCTION RESTARTS
The pushback in expectations for increased supply in the Chinese domestic market is mainly due to slower-than-expected production restarts. While six or seven smelters had fired up recently, metal form these operations will only be produced from August, another Shanghai-based aluminium analyst noted.
Some smelters had delayed plans to restart idled facilities after SHFE aluminium prices started to weaken late in April - they fell as low as 11,605 yuan per tonne early in June, sources noted. They have since recovered somewhat - August SHFE aluminium contract closed at 12,385 yuan on Tuesday, up 50 yuan from Monday’s close.
"As long as the aluminium price stays above 12,000 yuan, smelters should find it profitable to restart output," a Shanghai-based futures trader said. "But whether you get support from the government and banks to do so, there is another issue."
Some smelters have not been able to restart production because they are unable to get funding from banks, which are reluctant to lend to the sector - Beijing is actively discouraging capacity expansion in the industry, he said.
Some 700,000-800,000 tonnes per year of capacity will restart in the second half of this year, Chinese analysts estimate, while forecasts of new capacity start-ups in the second-half vary at 1-2 million tonnes per year.
Most of the new start-ups are expected in the fourth quarter - when Chinese aluminium prices could come under pressure, analysts said.
The backwardation in the spreads between the July SHFE contract and most active August contract was 170 yuan on Tuesday. It had moved above 300 yuan per tonne late in May and peaked at 485 yuan early in June.
(Editing by Mark Shaw)