A report from Bank of America Merrill Lynch (BofAML) Global Research predicts a global aluminium deficit by year’s end thanks in large part to capacity closures at smelters in the People’s Republic of China.
The report indicates word of capacity closures totaling 4.3 million metric tons per annum at smelters in Inner Mongolia Autonomous Region, Shandong, and the Xinjiang Uyghur Autonomous Region have spurred on aluminium prices over the summer months, and has boosted trading volumes at the SHFE as well.
“To that point, new longs have been the dominant aluminium position on SHFE, in contrast to the London Metals Exchange, where traders have been more cautious. Linked to that, trading volumes and realised volatility on SHFE have risen sharply. This is a risk because smelter closures have so far not fed fully into the physical market and China’s authorities tend to dampen unusual trading activity on the country’s commodity exchanges.”
According to BofAML analysts, China has been compelled to limit aluminium output due to the United States’ actions against them at the WTO. In addition, ire leveled at privately-held smelters like China Hongqiao, East Hope, and Xinfa for amassing a significant cache of illegal capacity has led to significant cuts of said capacity. The ever-embattled Hongqiao has borne the brunt of the cuts, losing 2.7 million metric tons per annum of capacity so far this year.
“Tallying up announced and implemented closures, we estimate that China’s aluminium production will come in at 34.9-million tonnes this year, low enough to push the global market into deficit, a key reason we maintain a Q4 price forecast of $2 150/t [or 98c/lb],” predicted BofAML’s analysts.
“Having said that, and looking further out, there is strong anecdotal evidence that operators in the world excluding China sector are picking up the baton in boosting output, making sustained rallies difficult in the medium-term,” they concluded.