Warning signs appear in aluminium prices, SMM reports

For those who are still bullish over aluminium prices, buyers need to watch out that the wind might begin to change direction soon for the light metal, which has proved to be the bright spot among base metals over the past few months, Shanghai Metals Market warns.

SHFE 1607 aluminium, the most active one, tumbled again after briefly touching 12,500 yuan per tonne. The contract ended down 1.83 per cent at 12,060 yuan per tonne on May 25.

It appears weird that steadily falling aluminium stocks, limited output supply, and expanding premiums in domestic spot market, should have given boost to aluminium prices.

Then, what caused the recent tumble?

SMM learns that some Chinese aluminium smelters will resume production in June, sparking fear that more smelters will follow suit. Meanwhile, downstream consumption will turn soft in June.

It is rumored that the amount of newly-approved SHFE aluminium delivery brands has reached a staggering 5 million tonnes. This triggered massive opening of short positions for hedging purpose, exerting heavy downward pressure on aluminium prices.

Investors used to take bullish bets on aluminium and zinc while take bearish bets on copper and nickel. However, their arbitrage positions were covered with copper and nickel prices falling to current lows and aluminium prices rising to their desired level. This also explained recent battering in the light metal.

SMM expects the most active SHFE aluminium contract to continue moving in the range of 12,000-12,500 yuan per tonne in coming 2-4 weeks. The 12,500 yuan per tonne level will see big selling pressure, while strong market fundamentals in spot market will lend prevent SHFE aluminium from falling below 12,000 yuan per tonne.

Aluminium prices will return to the downward track after about 2-4 weeks of time, SMM predicts.