Singapore 26/09/2016 - Transport disruptions in China that started last week are likely to continue to affect deliveries of electrolytic aluminium in the country and support domestic prices in the near term, market participants said.
Beijing last Wednesday introduced harsher regulations to curb the overloading of goods on trucks; Chinese authorities have since been strictly enforcing the new rules, sources said. This has resulted in delays while logistics firms renegotiate freight rates with users and more shipments are diverted to the railways, they said.
The transportation delay has caused supply tightness in the market - especially in eastern China - at a time when aluminium stock levels are already low, they added.
Aluminium inventories in five major Chinese cities - Shanghai, Wuxi, Hangzhou, Gongyi and Nanhai - fell 37,000 tonnes over two weeks to 277,000 tonnes on September 23 due to the transport problems, Shanghai Metals Market (SMM) estimated. Previously, stocks surveyed by the Chinese metals research firm had risen for five consecutive weeks.
The supply tightness is being exacerbated by strong demand during the current September-October peak period and stockpiling by users ahead of China's week-long national day holidays from October 1.
"If the current market is in balance, there probably won't be any tightness in the market due to the transport issues. But stocks are at low levels to begin with," Liu Xiaolei, an aluminium analyst at SMM, told FastMarkets.
The current stock level surveyed by SMM remains low compared to the first-half peak of 928,000 tonnes in the week of March 14.
Deliverable aluminium inventories at Shanghai Futures Exchange-registered warehouses fell for two consecutive weeks to 103,077 tonnes as of September 23, which is less than a third of their level in mid-March. Stocks had increased for two straight weeks before this.
It is difficult to gauge how long the disruptions could continue because the regulation was introduced just last week but it may take to mid- or late-October, Liu said.
Logistical tightness has buoyed aluminium prices since late last week and is likely to continue to provide near-term support, industry participants said.
The more stringent transport rules will affect aluminium deliveries and result in continued tightness in eastern China, China’s Galaxy Resources said in a report on Friday. But with SHFE aluminium already hitting 12,500 yuan per tonne, it is not advisable to continue going long on the metal, the Chinese futures brokerage cautioned.
The Shanghai Futures Exchange's November contract rose to a five-week high of 12,530 yuan on Friday but succumbed to profit-taking on Monday to finish at 12,420 yuan, down 75 yuan on Friday's close.
The tightness in the spot market is expected to persist at least for another week but premiums should come under pressure after the Chinese holidays, Minmetals Jingyi Futures said in a report
"We suggest going short after the holidays," the broker said on Friday.
SHFE aluminium has remained in backwardation since late April this year - production restarts and new capacity commissioning in the country have not been as fast as anticipated due to tight funds.
The backwardated spread between the SHFE October contract and November contract was at 490 yuan at Monday's close.
(Editing by Mark Shaw)