The aluminium front month contract demonstrated great resilience in 2020 by recovering quickly from the impact of Covid-19 on consumption that caused the price to hit an annual low of $11,560 yuan ($1,773) per tonne on March 30.
It maintained the recovery in the second quarter and has moved up dramatically since late September, supported by stronger demand post-lockdown and relatively low inventory. The SHFE aluminium contract soared to a nine-year high of 17,000 yuan per tonne on December 2 before recently retreating slightly to 16,000 yuan per tonne level.
Seasonality, demand trends support outlook Notwithstanding the impact of Covid-19 on China’s aluminium industry in 2020, the quarterly average SHFE aluminium daily closing price has been higher in the second quarter than in the first quarter every year since 2015.
The SHFE aluminium daily close averaged 14,032 yuan per tonne in the second quarter of 2019 compared with a quarterly average of 13,515.43 yuan per tonne in the first quarter of the year, Fastmarkets data shows. The price averaged 14,481.75 yuan per tonne and 14,287.63 yuan per tonne in the second and first quarters of 2018 respectively.
The seasonality of the price therefore supports market expectation that the outright Chinese aluminium price will perform similarly in 2021.
Meanwhile, aluminium inventory in SHFE-registered warehouses have been at a relatively low level since June after tumbling from this year’s peak of 533,994 tonnes on March 20. Market participants expect aluminium inventories to continue to fall in the first half of 2021 based on China’s strong demand expectations.
Stocks stood at 214.620 tonnes on December 11, compared with 232,577 tonnes a month earlier.
One end sector that has been drawing on aluminium stocks in 2020 is the automotive industry.
The automotive industry recorded a strong recovery after the effects of the pandemic started to subside in China in March, with both output and sales increasing for eight consecutive months to November. China Association of Automobile Manufacturers (CAAM) attributed the output and sales growth to a recovery in consumer confidence amid government policies and expects this confidence to continue into 2021.
The latest data from CAAM showed China produced 2.85 million units in November, up by 9.6% from a year ago and up by 11.5% from the month prior. Auto sales totaled 2.77 million units, up by 12.6% year on year and up by 7.6% month on month. In the year to date as a whole, Chinese auto output totaled 22.37 million units between January and November, down 3% from a year ago, compared with a 4.6% drop in the first 10 months of 2020.
The price of aluminium ingot ADC 12, widely used in the production of car wheels, has risen in the past few weeks on stronger demand from this end sector.
Fastmarkets’ weekly price assessment for aluminium ingot ADC12, exw dp China went up to 17,000-17,600 yuan per tonne on December 9, from 16,000-17,000 yuan per tonne the week before. The price has increased by 19% from 14,300 yuan per tonne at the beginning of the fourth quarter on October 7.
Fastmarkets aluminium analyst Yang Cao estimates the SHFE aluminium price will range 15,000-16,500 yuan per tonne in the first half of 2021 and slip gradually after the second quarter.
“We expect primary aluminium consumption to continue to grow by 2.9% in 2021, compared with this year’s 2.6% increase,” Cao said.
“Demand usually increases in the second quarter of each year and this [trend] will support the SHFE aluminium price to move up in the first half of 2021,” he added.
Supply risks Supply dynamics will dampen the aluminium price in the second half of 2021, however, Cao predicts.
Cao expects China to register a surplus of around 350,000 tonnes in 2021, compared with a 50,000-tonne surplus this year due to increased supply. This will cause the SHFE aluminium price to gradually trend lower next year, Cao said.
The reason for the expanded surplus next year is a ramp-up of new aluminium projects. A relatively lower Chinese alumina price enabled aluminium producers to lock a profit of 3,000-3,500 yuan per tonne when the SHFE aluminium price was at high levels of 16,000 yuan per tonne and encouraged them to speed up the construction of new projects.
The increased aluminium capacity will be visible in late 2021 because the majority of new projects are scheduled to reach full capacity in the second half of 2021.
“Although some new projects will be completed in the first half of 2021, it won’t show much impact on the market due to typically stronger demand in the second quarter,” an analyst in Shanghai said.
But before this new supply comes on stream, the aluminium price will be temporarily supported by winter production cuts that began in December, market participants told Fastmarkets.
Several regions of China have already started their winter cut policies due to high air pollution. Alumina refineries in northern regions have been ordered to cut certain volumes of production, which has offered some support for alumina prices and the downstream aluminium price as well.
“We were asked to only keep 50% of our alumina refinery [online] till the end of this month, and I have heard several other refineries have been given similar requirements. If more production reduced, the alumina price may move up,” an alumina refiner in Henan province said.
Fastmarkets’ weekly assessment for alumina metallurgical grade, ddp stood at 2,260-2,320 yuan per tonne on December 10, stable from the week prior, but up from 2,260-2,290 yuan per tonne on November 26.
Aluminium imports More imported aluminium ingots flooding to China on an open arbitrage window is considered another weakening point for the aluminium price next year. But whether the arbitrage window will remain open for the whole of 2021 is uncertain while its closure would be a barrier to seaborne material entering the Chinese market.
China was traditionally a net aluminium exporter before 2020 because the aluminium price in ex-China regions was higher than on the SHFE. But the stronger aluminium price in China this year has opened the arbitrage window several times for Chinese importers.
The arbitrage window opens for Chinese importer when the aluminium price on the SHFE is higher than the price on the London Metal Exchange, which entices aluminium sellers to ship the light metal to China to profit from the differential between the two exchanges.
Aluminium importers could enjoy a profit of around $38.27 per tonne on December 15, down from $118.28 per tonne on November 30. The arbitrage window has been open since the beginning of November, according to Fastmarkets’ calculations.
China imported 2,249,911 tonnes of unwrought aluminium and aluminium products from January to October 2020, up 383.5% from the same period last year, according to the data form China’s customs.
“We think January will see more cargoes shipped to China and less after that,” an aluminium ingot trader in Beijing said. “The arbitrage window is open now based on a relatively weaker LME aluminium price with Covid-19 impact still lingering. Next year, we estimate the aluminium price on the LME may bounce up due to recovering demand in ex-China regions.”
The LME daily official aluminium three-month price hit an annual low of $1,459.50 per tonne on April 8 before touching a two-and-a-half year high of $2,062 on December 2. It has since retreated slightly but remained above the psychological threshold of $2,000 per tonne since then.