Singapore 05/08/2016 - Aluminium contracts on the Shanghai Futures Exchange jumped suddenly in afternoon trading on Friday on word that six smelters have officially formed a joint venture.
Zhongheng Xieli Investment Co - formed by the Aluminium Corp of China, China’s State Power Investment Corp, Weiqiao Group, Yunnan Aluminium, Jiuquan Iron & Steel and Jinjiang Group - received an operating licence on Tuesday, according to local reports
The new development is in line with the smelters' plans earlier this year to form a joint venture for commercial stockpiling, sources told FastMarkets.
The news helped the SHFE October aluminium contract close 155 yuan higher at 12,220 yuan per tonne on Friday - the second-largest gain among the base metals on the day after tin - on expectations that the new company would support domestic spot prices and officially start stockpiling aluminium.
But market participants polled by FastMarkets do not see the smelters taking action in the near term because most smelters are profitable at current prices, they said.
"Stockpiling is something smelters would do when times are bad so as to support prices. But aluminium prices have rebounded and the spot market remains tight," a Shanghai-based aluminium analyst said.
The stockpiling idea was mooted by smelters late last year when aluminium prices were dipping due to massive oversupply in the Chinese market, causing smelters to operate at losses - the SHFE aluminium price slumped to an all-time low of 9,555 yuan in November.
In January, Beijing reportedly agreed to provide a three-year loan of 30 billion yuan ($4.6 billion) to Chinese base metal producers at zero or very low interest rates to carry out commercial stockpiling. Of that figure, 11 billion yuan was believed to have been allocated for buying one million tonnes of aluminium.
But aluminium prices have headed higher since November last year after smelters started to cut production; the stockpiling plans was put on the backburner, sources said.
The joint-venture company may find it difficult to agree a price at which to stockpile metal given the wide difference between the production costs of the six smelters, industry watchers also pointed out. The differential is as wide as 5,000 yuan per tonne between two of the smelters, a Shandong-based metals analyst estimated.
"Why would one smelter agree to buy metal to stockpile at a price of 11,500 yuan if its production cost is at 14,000 yuan?" he said.
But while the smelters may not start stockpiling now, the formation of the joint venture ensures they will be ready to do so should prices start falling in future, a Beijing-based metals analyst noted. Stockpiling could be viable if prices fall below 11,000-12,000 yuan per tonne, sources suggested.
There are concerns that Chinese and global aluminium prices could come under pressure from the fourth quarter due to production restarts among previously idled smelters and new capacity start-ups in China. The rate of stock declines in the SHFE aluminium warehouse system and the domestic spot market have slowed this week.
Domestic spot market inventory could start to rise from the end of August, Shanghai Metals Market said in a report on Friday.
(Editing by Mark Shaw)