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Aluminum: Fundamentals Have Not Improved
Dec 15, 2017

Shanghai aluminum prices fell below the integer mark of 10,000 yuan / ton at the end of 2015, reversing the floor, in less than two years to fill the decline of the previous four years. However, from the National Day to the present, prices plummeted from highs of 17300 yuan / ton to the current 14,300 yuan / ton, down as much as 17% in just two months, basically taking the first 10 months of gains .

Shanghai aluminum prices behind the logic is there anyway?

First, the supply and demand side determines the general direction of the price operation, and the capital side is the price booster. In November 2015, the central government proposed a supply-side reform. The prices of bulk commodities such as non-ferrous metals, rebar and coal coke all started to bottom out. This wave of rally continued into the third quarter of 2017. The whole year of 2016 was the year when aluminum ingots went to inventory. The inventories of aluminum ingots dropped to historic lows. The spot price premium soared to 500 yuan / ton at one time, pushing the price of Shanghai aluminum directly in short supply. However, entering 2017, changes in the supply and demand pattern of aluminum ingots, inventory gradually accumulated, so far, has not seen a turning point, the spot price has been in premium status. By the limited production and environmental protection funds, Shanghai aluminum prices accelerated. For bulls, if short-term price can not be "aggressive", then the disc adjacent contracts between about 100 yuan / ton spread will increase its holding costs, while for the short, it is to reduce the cost of holding positions. After August, Shanghai aluminum has not been able to effectively stabilize 17,000 yuan / ton platform, long on the need to be wary. Especially after the National Day, five-year and ten-year bond futures fell again and again, suggesting that the cost of capital in the market has risen and the funding level has become tighter. Coupled with the consumer is not busy, Shanghai aluminum in 16,500 yuan / ton hovering around two months later, the first did not go back down.

In contrast, aluminum inventories in LME have been reduced from 5.5 million tons in May 2014 to 1.1 million tons at present, and the supply of aluminum ingot in the world is tight. The author believes that the price ratio between SHFE and LME will continue to converge, which will help exports of aluminum products in order to consume domestic aluminum ingot stocks and ease the global shortage of aluminum ingot supply situation.

Second, coal prices can be used as early warning of aluminum ingot prices. The supply-side reform, the most affected are some high-energy-consuming industries, including the electrolytic aluminum industry. In electrolytic aluminum production, electricity costs account for more than 40%, while electricity costs are ultimately determined by coal prices. After bottoming out in late 2015, the prices of both aluminum and coking coal showed a wave of rally. Coking coal prices started to turn around in late August 2017, while aluminum was still rising at a time when the upward momentum was obviously insufficient.

In summary, the fundamental conditions for the resumption of price hikes in Shanghai aluminum should be the consumer pick-up, inventories decline in the spot price discount rate has not narrowed sharply, stocks are still continuing to accumulate, the end of the fund situation is tight, Aluminum prices are likely to weaken the oscillation. However, the trend of Shanghai aluminum lags behind coking coal for about two months. Coking coal bottomed out in late October. It is expected that Shanghai Aluminum will usher in a wave of rebound in early 2018. However, if the inventories are not sluggish and the consumption is not strong Out of the inverted market, still very difficult.


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