SMM Daily Review - 2011/9/19 Aluminum Market

Most active SHFE 1111 aluminum contract gapped lower at RMB 17,100/mt on September 19th due to aggressive short selling, and climbed to an intraday high of RMB 17,290/mt during initial trading hours on profit taking by the shorts. After the longs were forced to exit due to worries towards a downgrade on Italy debt by the credit rating agency Moody’s, the contract lost previous firm support at RMB 17,200/mt, and continued its downward move to finally close at RMB 17,105/mt, down RMB 25/mt or 1.44%. Positions of the contract decreased 4,284 lots to 111,514 lots. Position transfer to SHFE 1112 the next most active contract also continued. As aluminum consumption failed to improve as expected, SHFE aluminum plunged with other base metals, among which copper and zinc created yearly record lows. Though the most active SHFE 1111 aluminum contract was far from the yearly low, contracts for delivery after November all dropped below the RMB 17,000/mt mark. SMM expects the bearish tone to continuously prevail, and support for the most active contract at RMB 17,000/mt will also be relatively weak in the short term.

Traded prices of spot aluminum in Shanghai were between RMB 17,510-17,550/mt on September 19th, with premiums of RMB 120-160/mt over SHFE current-month aluminum price. In the morning, due to remaining weak spot aluminum consumption in September and increasing capital pressure approaching the month end, goods holders actively moved their goods at premiums above RMB 100/mt, with only a few exited the market due to low inventories. Purchases in the market were rarely seen as downstream buyers were consuming inventories. Market transactions, therefore, were extremely limited. In the afternoon, due to extended loss in SHFE current-month aluminum contract, a few middlemen purchased in the spot market. However, as the dropping run continued, the wait-and-see attitude gained strength, and quotations from goods holders were rarely seen with only a few transactions being reported early in the afternoon.

SMM weekly average aluminum ingot price for the week from September 13th to 16th was RMB 17,726/mt, down RMB 68/mt or 0.38% from previous week.

A recent SMM survey shows 64% of market respondents are pessimistic towards aluminum price trend this week. Their reasons include, lasting tight monetary polices have already pushed medium-to-small sized enterprise to the brink of collapse, and stagnating global economic recovery due to worsening European and US economies also pushed conventional peak consumption season back. Further more, though low spot aluminum inventories on reduced output which was caused by power restrictions forced the shorts to exit the market, the longs failed to gain strength given increasing capital pressure. Orders at aluminum producers did not improve much either due to disappointing terminal consumption, thereby engulfing aluminum consumption growth. Recent large scale short-selling has already dragged forward contracts for delivery after November to below the RMB 17,000/mt mark, and most active SHFE 1111 aluminum contract is also likely to drop below the level due to fragile support. With a new round of capital pressure mounting, aluminum price may extend the dropping move, if happened, to at least early October.

Remaining 36% of market respondents expect little change in this week's aluminum price . With high expectations for easing monetary polices from US Fed given poorly performed US economy, they believe the dropping trend will stop after Fed provides the easing policy support to help the longs gain strength. Meanwhile, remaining high spot premiums near RMB 150/mt after SHFE current-month aluminum contract changed also boosted goods holders’ confidence for the RMB 17,500/mt mark. With low selling interest at lower prices, aluminum price may even see a slight rebound.