Aluminum: No Obvious Supply-Demand Imbalance; Futures Prices Likely to Trade in a Range

　Shanghai aluminum staged a rebound after November, with the most active contract reaching a high of RMB 19,245 per tonne. However, as the month drew to a close, upward momentum weakened, and the market entered a phase of volatile consolidation. Given the limited number of positive catalysts in the near term, Shanghai aluminum is expected to trade in a range-bound, choppy pattern going forward.

　　I. Release of RRR Cut Signal to Alleviate Downward Pressure on the Domestic Economy

　　On the macro front, the People’s Bank of China has decided to cut the reserve requirement ratio for financial institutions by 0.25 percentage points effective December 5, 2022. This RRR cut underscores the forward-looking nature of monetary policy and demonstrates its strategic resolve, helping to stabilize market expectations and carrying significant policy implications. Although this is a broad-based RRR reduction, it does not signal a shift in the overall monetary policy stance; going forward, monetary policy will continue to maintain a prudent tone. Should the Medium-term Lending Facility rate be lowered later this year, the intensity of next year’s policy measures could be stepped up. As for its impact on Shanghai aluminum, the RRR cut will to some extent help offset downward pressure on the domestic economy, but its positive effect on Shanghai aluminum is likely to be limited.

　　II. Slight Recovery in Domestic Electrolytic Aluminum Supply

　　Domestic primary aluminum supply has seen a modest rebound recently. In Sichuan, operating capacity has slightly recovered, but constrained by power shortages during the dry season, full-capacity operation by year-end is expected to remain challenging. Meanwhile, spurred by Guangxi’s newly announced policies to encourage production resumption, aluminum smelting projects in the region are likely to accelerate their restarts. In Henan, the 80,000-ton capacity reduction has been fully implemented, though the timing for resuming production remains uncertain. In Guizhou and Inner Mongolia, progress on new capacity additions has fallen short of expectations. Overall, amid both increases and reductions, domestic primary aluminum operating capacity is exhibiting narrow fluctuations. November’s operating capacity is forecast to recover to 40.51 million tonnes, yet this still lags behind the previously anticipated annualized capacity of 41.00 million tonnes.

　　On the import–export front, following the return of China’s primary aluminum trade to a net-import position in June, October saw net imports reach a year-to-date high of 668,000 tonnes. In October, primary aluminum imports totaled 67,444 tonnes, down 51.78% year on year but up 4.27% month on month. From January to October, cumulative primary aluminum imports amounted to 429,700 tonnes, a year-on-year decline of 66.11%. Given that the domestic import window was close to opening in October and that some previously locked-price shipments have been arriving, primary aluminum imports are expected to continue posting month-on-month growth in November.

　　Electricity costs and alumina costs, as the two main components of primary aluminum production costs, account for 34% and 32%, respectively. Tracking changes in the cost structure and profitability of domestic primary aluminum producers reveals that overall production costs have declined to some extent compared with the same period last year, largely due to lower electricity prices. Although grid electricity prices have remained stable, falling coal prices have led to reductions in power tariffs at domestically owned captive power plants. According to SMM estimates, as of November 25, the total production cost for primary aluminum in China stood at RMB 17,815 per tonne, with a profit of RMB 1,215 per tonne; of this, electricity costs amounted to RMB 6,142 per tonne and alumina costs to RMB 5,441 per tonne. Compared with October 25, primary aluminum producers’ costs have fallen by RMB 95.46 per tonne, while year-on-year they are down RMB 2,270 per tonne. Meanwhile, profits have risen by RMB 575.46 per tonne since October 25 and by RMB 1,980 per tonne compared with the same period last year. Electricity pricing remains a key determinant of primary aluminum production costs; short-term coal prices are expected to stay weak, leaving further room for downward pressure on thermal power generation costs. However, given the anticipated rise in alumina prices, the overall scope for further reductions in primary aluminum production costs is likely to be relatively limited.

　　Based on inventory data, as of November 24, China’s social stock of primary aluminum stood at 518,000 tonnes, continuing the downward trend that began in October. With aluminum smelters cutting production and thereby reducing market supply, coupled with a higher proportion of alumina being converted into aluminum ingots—resulting in lower ingot output—the outlook for a build-up in primary-aluminum inventories in the near term is limited.

　　III. A Tale of Two Sides in Auto Production and Sales

　　Currently, downstream aluminum processing enterprises in China are largely operating at subdued capacity levels. As of November 24, the weekly operating rate for aluminum extrusion producers stood at 65.8%, down 2 percentage points from the previous week. Weak downstream demand and a decline in orders have led to reduced utilization rates across the primary alloy, aluminum extrusion, and aluminum foil sectors. Meanwhile, tightened COVID-19 control measures in Shandong, Henan, and other regions have hampered shipments for local downstream aluminum firms.

　　In the automotive sector, October saw a stark contrast between traditional internal-combustion vehicles, which experienced a marked decline, and new-energy vehicles, which surged ahead to repeatedly hit record highs. In October, automobile production and sales totaled 2.599 million units and 2.505 million units, respectively—down 2.7% and 4% month on month, but up 11.1% and 6.9% year on year. From January to October, cumulative production and sales reached 22.242 million units and 21.975 million units, respectively, representing year-on-year increases of 7.9% and 4.6%, with growth rates expanding by 0.5 percentage points and 0.3 percentage points, respectively, compared with the January–September period. Although pressure on the end-market led to a slight month-on-month drop in supply in October, the continued impact of the vehicle-purchase-tax reduction policy ensured that both production and sales maintained year-on-year growth. It is projected that China’s total automobile sales this year could reach 27 million units, up about 3% year on year. As for whether the preferential vehicle-purchase-tax policy for conventional gasoline-powered cars will be extended into next year, no definitive decision has yet been made; meanwhile, subsidies for new-energy vehicles are set to be introduced soon, leaving market expectations subject to a degree of uncertainty.

　　IV. Upside Pressure on Shanghai Aluminum Remains

　　On the macro front, signs of easing inflationary pressures in the United States may give the Federal Reserve more room to slow the pace of rate hikes, further boosting expectations for a dovish turn. Meanwhile, although China’s economy continues to recover, the underlying foundation for this recovery remains fragile. On the supply side, several domestic electrolytic aluminum producers have successively cut output, and the resumption of production and ramp-up of capacity are proceeding at a relatively slow pace, thereby alleviating some of the earlier supply-side constraints. On the demand side, sporadic COVID-19 outbreaks across multiple regions in China have exerted a certain drag on aluminum market demand, with downstream players remaining wary of higher prices; as a result, consumption is unlikely to deliver any standout performance during the seasonal low-demand period. Overall, with macroeconomic headwinds persisting and the supply–demand imbalance moderating, Shanghai aluminum is expected to trade in a range-bound, choppy pattern in the near term. The key support level for the most active Shanghai aluminum contract stands at RMB 18,200 per tonne, while the resistance level is at RMB 19,250 per tonne. (Wenhua Finance)