Singapore 31/08/2016 - The Shanghai aluminium backwardation that started late in April due to a tight domestic market could play out for longer - an increase in domestic supply has been slower than anticipated, market participants said.
The rebound in Chinese aluminium prices since November has prompted smelter restarts since the first quarter of this year. But the pace of restarts so far in 2016 has lagged behind expectations largely because smelters have not been able to secure funds to fire up production.
In the first half of this year, Chinese installed aluminium capacity rose only 1.5 million tonnes per year to 40.1 million tonnes - around 1.8 million tonnes per year of operating capacity was commissioned and about one million tonnes per year of capacity resumed over the same period, UC Rusal estimated in a report last week.
Chinese private-sector projects faced high funding costs and a lower return on investment, it noted.
Till the end of the year, another 500,000 tonnes per year of capacity could be restarted and a further 1.5 million tonnes per year of new capacity could be commissioned, according to Shanghai Metals Market (SMM).
But one Shanghai-based aluminium analyst doubts that all the 1.5 million tonnes per year of new capacity could come online this year.
"Many projects had been planned for this year but some have not been able to [start up] till now mainly due to funding problems. We have already heard of two such projects in Xinjiang," she said, referring to the northwest autonomous region of China where many new low-cost projects were previously expected to come online.
Spot market inventory in five Chinese major cities - Shanghai, Wuxi, Hangzhou, Gongyi and Nanhai - surveyed by SMM rose for two consecutive weeks after mostly trending downwards for around five months.
Stocks increased 26,000 tonnes to 267,000 tonnes in the fortnight to August 19 but remain low compared to the first-half peak of 928,000 tonnes in the week of March 14. Inventories are likely to remain near multi-year lows in the second half of the year, SMM forecast.
The rise in Chinese market stocks has not been obvious or consistent so far, other market observers said.
After 15 weeks of consecutive declines, there was a brief one-week rise in aluminium stocks in the SHFE warehouse system in the August 8 week. Inventories have since fallen for another two straight weeks, taking stocks to 103,702 as of August 26 - less than a third of inventories in mid-March
Supply is no longer tight in the market, sources agreed, although they noted that part of the increase in domestic supply is being absorbed by improving demand.
"Demand is better this month compared to the previous month. Our survey in the Guangdong region last week showed that demand is strong,” the aluminium analyst said.
The southern Chinese province is a major downstream fabricating base in the country.
Demand in China also tends to pick up in the traditional peak demand period of September-October.
SHFE aluminium prices could hold up until the end of the year and are likely to come under pressure from increased supply only in December or January, SMM aluminium analyst Liu Xiaolei told FastMarkets.
"Demand is picking up at a time when inventory is still low," he said.
The backwardation in the spread between the SHFE September contract and the November contract was 300 yuan at Wednesday's close. The most active SHFE October aluminium contract finished at 12,215 yuan on Wednesday, down 105 yuan on the previous day's close.
(Editing by Mark Shaw)