DJ China Aluminum Stocks On The Decline; Prices May Test Highs In 3Q

China's aluminum stocks have fallen sharply since reaching a record in early March, and if the trend continues, prices could exceed highs seen in February, industry participants said.

Higher Chinese prices could undergird global prices, as the country accounts for 40% of global aluminum consumption.

Non-exchange stock levels stood at 373,000 metric tons Monday, down more than half from a record high of 800,000 tons in early March, according to data from the Shanghai Metals Market. Inventories at the Shanghai Futures Exchange declined by 43% to around 238,894 tons during the same period.

Any further decline will mark a turnaround from the oversupplied market conditions experienced since 2009, traders said.

"If stocks fall to around 350,000 tons, which is one week of China's aluminum consumption, that's when the market is really going to stage an uptrend," said a trader at a large foreign firm in Shanghai.

Industry participants attributed the declines to firm domestic demand and healthy export orders outweighing rising domestic output in the second quarter.

Production of semi-finished aluminum, which is mainly made from primary aluminum, rose by an average of 30% a month to 10.37 million tons in the first five months of 2011 on the back of firm demand from the automobile and property sectors, analysts said.

"Sales have been really good in the past few months, especially from Henan province," said a sales manager at a major aluminum producer with an annual capacity of 850,000 tons.

Consequently, spot aluminum has been trading at a consistent premium of around CNY60/ton against the front-month SHFE contract, double the premium of around CNY20-CNY30/ton over the past two years.

"A premium of CNY60/ton is once in a decade thing," said the trader at the large foreign firm.

"Along the industry chain, things have been really improving in the past few months, and one outstanding part is the export sector," Galaxy Securities Futures analyst Sun Lei said.

Exports of semi-finished aluminum products rose 47% on year to 1.22 million tons in the January to May period, according to data from the General Administration of Customs.

Meanwhile, the pace of supply growth has slackened over the past few months, as Beijing has halted approvals of new or planned aluminum projects and as rising energy prices have prompted investors to shelve as-yet-incomplete projects.

Traders and analysts tipped aluminum prices to stage a comeback in the third quarter.

"We don't rush to sell these days as we want to wait and see if prices rise further," said the trader at the foreign firm in Shanghai.

If the second-quarter trend continues, "prices are absolutely likely to reach above CNY180,000/ton" in the third quarter, said aluminum analyst Li Yang at the state-owned metals consultancy Beijing Antaike.

However, if higher prices prompt a scramble to put new capacity online, price rises could be limited, as they could be if talk of a cut on export tax rebates for semi-finished aluminum products comes true, industry participants said.