Both supply and demand are exceeding expectations, and aluminum prices are bullish in the future

After electrolytic aluminum fell out of its historical bottom in the fourth quarter of 2015, its production capacity contracted sharply, the operating rate fell to 80%, and the operating capacity fell to a low of 29.12 million tons in December 2015. At present, although the price has risen by about 20%, the author found that the supply contraction continues, and it is difficult for the resumption of production to become the mainstream.

The supply contraction continues to resume production, which is lower than expected.

It is understood that the current increase in electrolytic aluminum production capacity is very small. The operating capacity in April 2016 only rose to 30.12 million tons, only an increase of 1 million tons from the low point at the end of last year. The decline in operating capacity has manifested itself as a real negative growth in output since 2016, which is very difficult for the original aluminum output growth rate of about 10%. According to the author’s research, within the next six months, it is possible to resume production and the theoretical value of newly added capacity is 5 million tons. However, due to the constraints of power supply and capital constraints, the process of supply and delivery will most likely be lower than expected. Only 60% of the new supply can be released smoothly.

Downstream demand is picking up, inventory continues to decline

At present, the downstream demand for electrolytic aluminum in my country is picking up, and the operating rate of downstream aluminum processing enterprises has increased. Including aluminum profiles, aluminum strips, aluminum cables, recycled and primary aluminum alloys, etc. After the operating rate has increased, processing companies have increased their stocks.

In April of this year, spot inventories in Shanghai, Wuxi, Nanhai, Hangzhou, and Gongyi declined, verifying the reality of demand picking up and output shrinking. The aluminum ingot inventory data of the above five places shows that since February, the spot inventory has been lower than the level of previous years, and began to decline in April, which further verifies the reality of demand recovery and production contraction.

Resumption of production and insufficient supply of new production capacity has a significant supply gap

It is understood that the current operating capacity is still insufficient to meet consumption. Since the fourth quarter of 2015, domestic electrolytic aluminum production has been reduced significantly. The current production capacity has not returned to the level before the reduction. The current operating capacity is about 31 million tons, and the current estimated aluminum consumption is 33.5 million to 34 million tons. The balance can only be achieved after the production capacity is reached.

In addition, due to factors such as electricity costs and capital, the resumption of electrolytic aluminum production and new capacity are limited. First, some provinces are considering lowering electricity price subsidies and increasing the cost of resuming production. Recently, Qinghai Province has begun to consider canceling electricity price subsidies. The government and the power grid believe that aluminum prices have risen to around 12,000 yuan/ton. The previous policy needs to be cancelled. For companies that fail to resume production, it means that the cost of resuming production will increase, and the profit space will be compressed. Difficulties in childbirth are even more difficult. The second is the obvious suppression of capital factors. Under the trend of supply-side reform, banks’ tightening of credit to non-ferrous industries will also suppress the resumption of electrolytic aluminum production. The third is the limited availability of new production capacity. Xinjiang’s new production capacity of 350,000 tons in 2016 was mainly reflected in Shandong and Inner Mongolia. There was not much new production capacity in other regions. Only Weiqiao in Shandong still has room, but environmental protection and other factors also restrict the development of Weiqiao.

The author predicts that within the next six months, it is possible to resume production and add 5 million tons of new capacity (theoretical value). In fact, due to the constraints of power supply, capital and other factors, only 60% of the capacity can operate. In the next six months, the electrolytic aluminum market will still have a significant shortage.

Stock exchanges continue to decline, market bullish sentiment is rising

The author predicts that the future downside of electrolytic aluminum prices will be limited, and the upward momentum will remain strong. First, the price and cost support of electrolytic aluminum is significant. Since the beginning of this year, as the prices of raw materials such as alumina and coal have risen, the cost of electrolytic aluminum has gradually moved up to 11,790 yuan/ton, providing solid support for aluminum prices. Second, the spot price maintains premiums, and aluminum ingots continue to be in short supply. Since 2016, with the depletion of supply and the recovery of demand, the overseas and Chinese aluminum spot markets have seen a significant improvement. The LME aluminum spot has gradually shifted from a discount to a premium pattern, with a premium of US$20/ton at a time. The Shanghai spot has continued to have premiums since April, and the premium has now been 15 yuan/ton. Third, stock exchanges continue to decline, and the global inventory consumption ratio has been at a historically low level. LME aluminum inventories have fallen from the highest of 5.47 million tons in 2014 to the current 2.71 million tons, a drop of nearly 50%, which has fallen to the lowest level in the past six years.

After electrolytic aluminum fell out of its historical bottom in the fourth quarter of 2015, its production capacity contracted sharply, the operating rate fell to 80%, and the operating capacity fell to a low of 29.12 million tons in December 2015. At present, although the price has risen by about 20%, the author found that the supply contraction continues, and it is difficult for the resumption of production to become the mainstream.

The supply contraction continues to resume production, which is lower than expected.

It is understood that the current increase in electrolytic aluminum production capacity is very small. The operating capacity in April 2016 only rose to 30.12 million tons, only an increase of 1 million tons from the low point at the end of last year. The decline in operating capacity has manifested itself as a real negative growth in output since 2016, which is very difficult for the original aluminum output growth rate of about 10%. According to the author’s research, within the next six months, it is possible to resume production and the theoretical value of newly added capacity is 5 million tons. However, due to the constraints of power supply and capital constraints, the process of supply and delivery will most likely be lower than expected. Only 60% of the new supply can be released smoothly.

Downstream demand is picking up, inventory continues to decline

At present, the downstream demand for electrolytic aluminum in my country is picking up, and the operating rate of downstream aluminum processing enterprises has increased. Including aluminum profiles, aluminum strips, aluminum cables, recycled and primary aluminum alloys, etc. After the operating rate has increased, processing companies have increased their stocks.

In April of this year, spot inventories in Shanghai, Wuxi, Nanhai, Hangzhou, and Gongyi declined, verifying the reality of demand picking up and output shrinking. The aluminum ingot inventory data of the above five places shows that since February, the spot inventory has been lower than the level of previous years, and began to decline in April, which further verifies the reality of demand recovery and production contraction.

Resumption of production and insufficient supply of new production capacity has a significant supply gap

It is understood that the current operating capacity is still insufficient to meet consumption. Since the fourth quarter of 2015, domestic electrolytic aluminum production has been reduced significantly. The current production capacity has not returned to the level before the reduction. The current operating capacity is about 31 million tons, and the current estimated aluminum consumption is 33.5 million to 34 million tons. The balance can only be achieved after the production capacity is reached.

In addition, due to factors such as electricity costs and capital, the resumption of electrolytic aluminum production and new capacity are limited. First, some provinces are considering lowering electricity price subsidies and increasing the cost of resuming production. Recently, Qinghai Province has begun to consider canceling electricity price subsidies. The government and the power grid believe that aluminum prices have risen to around 12,000 yuan/ton. The previous policy needs to be cancelled. For companies that fail to resume production, it means that the cost of resuming production will increase, and the profit space will be compressed. Difficulties in childbirth are even more difficult. The second is the obvious suppression of capital factors. Under the trend of supply-side reform, banks’ tightening of credit to non-ferrous industries will also suppress the resumption of electrolytic aluminum production. The third is the limited availability of new production capacity. Xinjiang’s new production capacity of 350,000 tons in 2016 was mainly reflected in Shandong and Inner Mongolia. There was not much new production capacity in other regions. Only Weiqiao in Shandong still has room, but environmental protection and other factors also restrict the development of Weiqiao.

The author predicts that within the next six months, it is possible to resume production and add 5 million tons of new capacity (theoretical value). In fact, due to the constraints of power supply, capital and other factors, only 60% of the capacity can operate. In the next six months, the electrolytic aluminum market will still have a significant shortage.

Stock exchanges continue to decline, market bullish sentiment is rising

The author predicts that the future downside of electrolytic aluminum prices will be limited, and the upward momentum will remain strong. First, the price and cost support of electrolytic aluminum is significant. Since the beginning of this year, as the prices of raw materials such as alumina and coal have risen, the cost of electrolytic aluminum has gradually moved up to 11,790 yuan/ton, providing solid support for aluminum prices. Second, the spot price maintains premiums, and aluminum ingots continue to be in short supply. Since 2016, with the depletion of supply and the recovery of demand, the overseas and Chinese aluminum spot markets have seen a significant improvement. The LME aluminum spot has gradually shifted from a discount to a premium pattern, with a premium of US$20/ton at a time. The Shanghai spot has continued to have premiums since April, and the premium has now been 15 yuan/ton. Third, stock exchanges continue to decline, and the global inventory consumption ratio has been at a historically low level. LME aluminum inventories have fallen from the highest of 5.47 million tons in 2014 to the current 2.71 million tons, a drop of nearly 50%, which has fallen to the lowest level in the past six years.