When production recovery meets cost support, where will the entangled aluminum price go?

In August, the Shanghai aluminum price showed a trend of rising and falling. The main price in the middle of the month rose to a high of 12,795. In the later period, as the U.S. economic data became better, interest rate hike expectations became stronger, and the effect of the new capacity in the early stage began to appear, and the high profits also made the spot market. Enterprises gradually increased their hedging efforts, and the Shanghai aluminum prices began to fall. However, on the whole, the spot aluminum ingot is still relatively tight, the premium is strong, and the prices of raw materials such as coal and alumina have risen. Aluminum prices still have strong support at low levels. It is expected that aluminum prices will maintain a relatively weak and volatile pattern in the third quarter.

1. High profits prompt enterprises to resume production

With the exception of very few companies, the current aluminum price has made the aluminum smelting industry profitable as a whole. Recently, many aluminum companies have published semi-annual reports, and the performance of each company is as follows:

Although the price of alumina and coal has risen recently, the production cost of enterprises has risen. According to Antaike’s statistics in July 2016, the national average complete cost was 11,460 yuan/ton, but compared with aluminum prices, there is still a large profit margin. As the aluminum price remained high for a long time, the confidence of smelters began to gradually recover, and the situation of new additions and resumption of production was on the rise. Although the output data alone is still slightly lower than the same period last year, it has stabilized at a high level. At the same time, the built and started production capacity has also reached a new high. Since the increase in production capacity will take some time to transition to the output data, the output is expected in the third quarter. Growth is limited, and the mid to late fourth quarter or next year will be less optimistic.

2. Demand growth rate began to decline

  • 1. Real estate The momentum of real estate growth has slowed since April, and the cumulative growth rate of various data has declined for the third consecutive month. At the same time, Xiamen and Wuhan successively promulgated purchase restrictions and loan restrictions recently, which also indicates that the government may further regulate and tighten the property market in the future. It is expected that the growth rate of the real estate market will continue to slow down in the future.
  • 2. Aluminum market This year, the overall performance of the aluminum market has been good. We recently visited several strip processing plants in Henan and all indicated that the current orders can basically keep the company at full production. At the same time, due to the continuous depreciation of the renminbi, which is good for aluminum exports, even some companies that have not done export business before have also begun to export aluminum.
  • 3. The automobile market The automobile market has performed well in the near future, rising for the fourth consecutive month year-on-year. At the same time, the continuous popularization of new energy vehicles has greatly promoted the demand for aluminum.

3. Inventories remain low to support aluminum prices

With the gradual recovery of electrolytic aluminum production capacity, and downstream demand began to gradually slow down, inventory in five places began to rebound from a low level. However, because the company still maintains a low amount of ingots, the inventory growth is relatively slow. At the same time, the large backlog of aluminum rod inventory has also led to a significant decline in aluminum rod processing costs. The company’s current production of aluminum rod profits has been compressed to a low point, while the aluminum ingots in the same period still maintain a high premium. As the differentiation continues, the company may decrease The output of aluminum rods may increase the output of aluminum ingots.

Futures inventories continued the trend of previous declines. As of August 26, they had fallen to just over 100,000 tons. The sharp decline in inventories continued to cause market speculation about the shortage of deliverables. At the same time, the high premium on the spot has also benefited the mode of companies selling and closing their positions even more, giving Shanghai aluminum prices more obvious support at low levels.

4. Funds in the aluminum market are still slowly leaving the market

The tepid performance of the aluminum market has also led to a declining degree of capital’s attention to it. With the continuation of the aluminum price shock, it is expected that funds will remain tepid, waiting for the direction to emerge.

In summary, after several strong spikes in aluminum prices in Shanghai, the kinetic energy began to weaken. The pressure of high-level hedging by aluminum factories has continued to increase, the continuous increase in production capacity, and the expectation of US dollar interest rate hikes have curbed the rise in aluminum prices. However, at the same time, the amount of ingots of enterprises is low, the stock of futures is at the bottom, and the rising production cost also makes the aluminum price have obvious support at the bottom. We expect that aluminum prices will remain weak and fluctuating for a period of time. The main Shanghai aluminum contract fluctuates between 11800-12300. It is recommended to buy on dips and sell short on rallies.

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