Can supply side reforms support aluminium prices in the long term? Market fundamentals to play a key role

The fourth round of environmental inspections in China has started in 31 provinces and metal producers in the regions covered by the scan have been required to shut down for environmental reasons. Aluminium producers in many regions of Zhejiang have closed for environmental check.

An SMM report says environmental protection tax will take effect in China from January 1. Three departments have recently issued a notice recently regarding implementation of environmental protection tax.

Though optimistic speculations over supply side reform and production cut policy on environmental checks have sent LME and SHFE aluminium prices to new highs; SMM projects that the market would still be affected by poor market fundamentals.

China’s annualized operational aluminium capacity stood at 36.74 million tonnes in July, up 5.22 million tonnes YoY. New and restarted capacity has come online on a large scale since 2016 following the upturn in aluminium prices. 

China’s monthly aluminium output also rose sharply in 2017 YoY. SMM data showed that the country produced 21.42 million tonnes of aluminium during the first seven months of this year, up 20.9% YoY. Such a huge supply surplus is not expected to be reversed by the proposed output cuts.

Domestic aluminium stocks have been rising continuously since October 2016, due to big growth in production. Spot discounts on aluminium have been increasing over the past few months due to surging SHFE aluminium, reaching 180-220 RMB/tonne on Aug. 10. 

SMM observes that without support from market fundamentals, aluminium prices are at risks of falling back again.  On August 16, SHFE 1708 aluminium closed at RMB 15,600/t, with settlement price at RMB 15,605/t.