London 11/07/2016 - A switch to liquid metal shipments artificially tightened the aluminium market in China during the second quarter of this year, Citi Bank said while forecasting a decline in the price.
An increasing trend of shipping aluminium metal in liquid from smelters to fabricators tightened ingot supply and propped up the Shanghai Futures Exchange (SHFE) aluminium price, the bank said in a report.
As well, spot supply tightness kept SHFE aluminium in a backwardation from late in April - the back between the July and September contracts was last at 410 yuan and has held above 400 yuan since Wednesday last week.
"As the SHFE aluminium contract is solely an ingot contract, this metal shipping trend has led to a tightening of the Chinese ingot market, and is, in our view partially responsible for the SHFE market tightness. We see this perceived tightness as artificial, with the overall Chinese market being in surplus this year by 2.8 million tonnes," it said.
Costs were a key factor to the switch to metal liquid shipping, enabling smelters to bypass the cost of running a casthouse and associated casting losses while product fabricators can reduce the need for remelt costs.
Chinese VAT-inclusive aluminium prices are around 12,430 yuan per tonne, Citi said on Monday.
At current prices, only three percent of Chinese smelter capacity is failing to break even while around 60 percent of Chinese smelter capacity is cash-positive at current LME prices.
On the LME, three-month metal was last at $1,666 per tonne, up $3 on Friday's close while SHFE aluminium rose 55 yuan to 12,620 yuan on Monday. Tightness was further exacerbated by heavy rains and floods in parts of China that have hampered transport.
Still, the bank continues to expect stronger Chinese output and exports as well as producer hedging to cap rallies. A gradual recovery in production is set to continue in the second half, particularly with new capacity coming on line from major producers such as Hongqiao.
For 2016, Citi expects Chinese production to reach 31.7 million tonnes - up four percent on 2015 levels.
The bank remains bearish on aluminium on continued structural over-supply issues. It expects prices to ease from their $1,650 in early July to average $1,560 in third quarter and $1,530 in the fourth quarter. In 2017, the bank expects prices to average $1,530.
(Additional reporting by Vivian Teo, editing by Mark Shaw)