By Susan Zhou
Shanghai 23/12/2016 – Chinese aluminium imports in 2017 will be driven by the opening of the Shanghai-London arbitrage as well as the spot-LME arbitrage, whilst exports are expected to continue to be supported by a weaker yuan and strong demand.
The arbitrage window for aluminium imports opened briefly in May 2016 and from late October until early November, resulting in a greater volume of aluminium shipments to China in mid-late 2016, however the increase on imports is likely to cease by the end of this year or early next year.
Whether or not we see more imports in the new year depends on whether there are favourable arbitrage opportunities between the Shanghai Futures Exchange and the London Metal Exchange, as well as the spot-LME arbitrage – being the difference in aluminium prices between the physical trading market in China and the London bourse.
China imported 87,403 tonnes of primary aluminium in the first ten months of 2016, down from 136,575 tonnes in the same period of last year.
With the supply of aluminium expected to gradually stabilise into early 2017, the market will see a narrowing of the difference between domestic Chinese and LME prices.
As a result, the speculative demand for imported aluminium is expected to dwindle until the arbitrage window opens again.
“Given that SHFE aluminium price continued to slip, I expect that the spot price in the physical market in China will move down soon after new year, which means the profit margin for imports will narrow accordingly,” a trader from eastern China said.
Meanwhile, the weakening Chinese yuan and its uncertain outlook in 2017 are expected to discourage imports to some extent.
Some market participants are pessimistic about the yuan despite major economists in China saying it is less likely that the Chinese currency will slump in the future.
“I think the CNY will break 7 against the US dollar after Chinese New Year [at the end of January],” a base metals trader predicated.
The yuan stood at 6.9049 against the US dollar at the close on Tuesday December 13.
If there is no similar widening of the SHFE-LME or spot-LME arbitrages in 2017, the major drive for imported aluminium will continue to come from aluminium fabricators in China who use tolling agreements.
Under these tolling agreements, fabricators in China are exempt from import and export tax, and receive a full rebate on value added tax (VAT) if their aluminium products exports volumes match their primary aluminium imports.
“Volumes of aluminium imported by tolling fabricators will stabilise at several thousand tonnes per month,” a trader from southern China said.
“I expect there will be demand of around 50,000-60,000 tonnes of imported aluminium from tolling fabricators in China next year,” a second trader from southern China estimated.
But China will still see big volumes of imports arriving in the final months of 2016 and into early 2017 due to massive buying in October and November when the import arbitrage window was open, a trader from eastern China said.
Review of aluminium imports in 2016
The opening of the spot-LME arbitrage window in mid-May 2016 was brief, lasting about three to four days, according to market sources. Still, shipments of aluminium to China surged sharply to 13,931 tonnes in June from just 1,980 tonnes in May.
“Some traders took this opportunity to build up stocks while most consumers missed it,” a trader said.
The SHFE-LME arbitrage opened again in late October, benefitting some buyers who had missed out on the May arbitrage opportunity.
The SHFE-LME differential for aluminium reached $43.28 per tonne on October 25 due to a continuous rally in SHFE aluminium prices. The import window lasted for six days.
Meanwhile, the spot-LME arbitrage for aluminium continued into late November, well after the SHFE-LME arbitrage closed, as spot aluminium prices in China kept rising.
The spot aluminium price in Guangdong province rallied to 16,300 yuan ($2,361) per tonne on November 23, while average Chinese aluminium spot prices reached about 15,000 yuan, according to a trader from southern China.
The three-month aluminium contract on the LME closed at $1,778 per tonne on Wednesday November 23.
The difference between southern China spot and LME aluminium prices hit nearly $600 on November 23, before import tax and VAT.
Speculative buying, on the back of these favourable conditions, was the main driving force in increased aluminium shipments to China in November and December, according to market participants.
Export of aluminium fabricated products strong in 2017
Chinese aluminium exports had a generally positive performance in 2016, and market participants expect this to last into the new year.
In fact, export volumes in 2016 were much higher than expected given that the SHFE-LME aluminium arbitrage has not been favourable for exports, a trader said.
Chinese aluminium products have garnered increasing recognition from global consumers, a trader commented, which will be reflected in positive export data.
In the first ten months of 2016, China exported 3.4 million tonnes of unwrought aluminium and aluminium products, an increase of nearly 12% year-on-year.
International demand for aluminium products, such as aluminium tubes, foils and plates, has increased, resulting in a continuous rise in China’s export volumes, an analyst from a futures company said.
The weak performance of the yuan, especially in the second half of 2016, has lent further support to the export of aluminium fabricated products.
If the favourable factors of overseas demand and the depreciation of the yuan continue, exports next year are expected to remain upbeat, the futures analyst added.
“Given that Chinese aluminium producers have a competitive tolling fee for aluminium fabricated products in the international market, I think China will keep its good performance on aluminium fabricated products export next year,” the same analyst added.
“Aluminium products exports will increase next year as I see a growing demand from the international market, especially from North America, followed by South East Asia, and demand from the European market is just ok,” a source from an aluminium fabricator in China told Metal Bulletin on the sidelines of a major international aluminium exhibition in Germany in November.
Chinese exporters of aluminium semi products, such as flat rolled products, extrusion products and foils, do not need to pay export duties, and receive a 13% VAT rebate on flat rolled products and extrusion products as well as a 15% VAT rebate on foils.
However, with some aluminium semi capacity being restarted during the second half of this year and more expected to be resumed next year, there will undoubtedly be a battle for tolling fees among aluminium fabricators from China, he added.
“Fabricators in China will compete with each other by offering lower tolling fees next year,” another trader predicted.
(Editin by Wei Jun Lau)