June aluminium price forecast: China smelting capacity firing back up?

As aluminium prices have whittled away their May gains by the beginning of June, news from a Goldman Sachs report indicates Chinese aluminium output is about to get ramped up again.

Bloomberg recently reported that “with most producers in the world’s largest supplier [China] posting solid margins,output growth will accelerate to 4 per cent year-on-year in the second half after contracting 1.7 per cent in the first four months,” according to a Goldman report released Monday.

As capacity fires back up, “the bank sees prices dropping to $1,450 a metric ton in three months, $1,400 in six months and to $1,350 in a year, reiterating previous forecasts.”

SMM spot aluminium price gained 200 yuan/tonne week-on-week to 12,574 yuan/tonne in the week ending June 3. This expanded profit at smelters in our sample to 1,300-1,400 yuan/tonne.

However, smelters will face a slight increase in power costs in June, SMM expects.

Rising Bohai-Rim Steam-Coal Price Index (BSPI) and coal mine mouth prices in Yulin, Datong and Ordos, etc. will add to power costs at aluminium smelters with capital power, SMM explained. Nevertheless, analysts take some other factors into consideration.

As they had noted earlier this month, China exported 400,000 mt of unwrought aluminium back in April. This represents a year-over-year decline of 7.8 per cent, supporting the argument that domestic demand has picked up there thanks to the stimulus effect. However, how robust and for how long that uptick is likely to last is extremely difficult to tell.

The sustainability of aluminium prices will still depend on this fluctuation in Chinese aluminium production and on how much China can inflate aluminium demand through further stimulus measures. Both factors remain quite uncertain at the moment.