China to account for global aluminium deficit in 2019; SHFE outperforms LME on falling supply

Shanghai Aluminium prices are outperforming the LME aluminium prices as the falling domestic supply is boosting prices, while weak demand in the rest of the world is putting pressure on the prices. This equation is likely to continue in the medium term.

Benchmark LME aluminium price hit its lowest since January 2017 at US$ 1697 per tonne in the beginning of October, a drop of 12% since March when the trade dispute between the United States and China escalated. Prices on the Shanghai Futures Exchange are currently around RMB 14,000 per tonne or US$ 1965 per tonne after a week-long National Day holiday.  

“Normally the disconnect would not last as China would export less,” said Citi analyst Tracy Liao.

That means abundant supply in the domestic market which will put pressure on the prices. But demand from local manufacturers is going up, which will keep prices high.  China accounts for 55% of the total global aluminium supply and Data from the International Aluminium Institute shows China’s aluminium production fell 13% YoY to about 21 million tonnes between January and August 2019.

Analysts expect the gap between new supply and demand in China to be covered by stocks of about seven million tonnes accumulated since 2010.

Wood Mackenzie forecasts a deficit of about one million tonnes in 2019, which will be because of the drop in China.  China closed about 3 million tonnes of production in H2 2019 and added more to it this year including the closure from Xinfa Group and China Hongqiao Group.

Global aluminium stocks are expected by Wood Mackenzie to end the year at 12 million tonnes. Wood Mackenzie expects global demand to grow 1.1% in 2019 from 3.6%  in 2018 and Chinese demand to rise 2.9% from 6.1% in 2018.