Singapore 07/09/2016 - Aluminium has come under pressure this week on the Shanghai Futures Exchange, trading below 12,000 yuan for the first time since June amid rising domestic inventories.
The SHFE November contract fell as low as 11,850 yuan per tonne on Monday - the last time the most active SHFE aluminium contract traded below 12,000 yuan was on June 20. The contract closed at 12,010 yuan on Wednesday, up 15 yuan from Tuesday’s close.
"The increase in market inventory by around 10,000 tonnes every week is having an effect on the market," a Shandong-based metals analyst told FastMarkets.
Spot market inventory in five Chinese major cities - Shanghai, Wuxi, Hangzhou, Gongyi and Nanhai - surveyed by Shanghai Metals Market has risen for four consecutive weeks after mostly trending downwards for around five months.
Stocks rose 53,000 tonnes in August and reached 299,000 tonnes on September 2. The uptrend will continue while production rises from new projects and capacity restarts, SMM forecast.
Deliverable aluminium inventory in SHFE-registered warehouses reversed two consecutive weeks of declines last week, increasing 14,335 tonnes or 13.9 percent to 117,407 tonnes as of September 2.
Still, analysts see support for SHFE aluminium at 12,000 yuan at least over this month and next due to the start of the two-month peak demand period in September - domestic aluminium demand has already picked up since August.
"Good demand is the reason why SHFE aluminium could rebound after falling below 12,000 yuan," a Shanghai-based aluminium analyst said.
While stocks have been increasing, they remain low compared with the first half of this year. In mid-March, SHFE warehouse stocks were around 340,000 tonnes, while spot market inventory was 928,000 tonnes, according to SMM.
Production restarts and new capacity commissioning have also not been as fast as expected due to tight funds among smelters. This has kept SHFE aluminium backwardated since late April this year.
Prices may only come under pressure closer to end of the year once production and stocks build up, analysts said.
"Profits are probably at the best levels for aluminium smelters now but this is unlikely to continue," the first analyst said. "Domestic output could exceed demand by the end of the year."
Softness in the dollar brought about by forecast-missing US economic data has curbed expectations of a near-term US rate rise; this is also supporting SHFE aluminium prices for now.
But any significant upside for SHFE aluminium is likely to be checked by concerns over rising domestic supply, SMM added on Wednesday.
The backwardation in the spread between the SHFE September contract and the November contract was 445 yuan at Wednesday's close.
(Editing by Mark Shaw)