China aluminum dances to its own beat as LME stumbles

Stock image.

A robust recovery in aluminum demand in China has boosted prices in the world’s top consumer and producer of the metal by more than 10% in a month, but traders say weak demand for Chinese exports could soon take the shine off the market.

Shanghai Futures Exchange’s (ShFE) most-active aluminum contract hit a seven-week high on Wednesday of 12,760 yuan ($1,799.67) a tonne, after rising 10.2% over the last four weeks, Refinitiv data showed.

A Singapore-based trader, speaking on condition of anonymity, said buyers considered prices so low, they were increasing inventory levels “more than normal”.

“The re-stocking in reality is faster than expected,” said another metals trader, adding that plans for government-subsidised stocking programmes also lent support.

The devastation wrought by the coronavirus pandemic sent ShFE aluminum to a four-year low in April, forcing some smelters to cut capacity.

Reuters Graphic

But the economic slowdown also led to less scrap metal production, which helped to fuel the rebound in refined metal prices as industrial activity recovered.

Spot aluminum prices in the processing hub of Jiangsu <SMM-ALU-ECHNJI> on Wednesday hit a two-month high of 12,980 yuan a tonne, SMM data showed.

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China’s Yunnan province said it would help businesses stockpile 800,000 tonnes of metal, while Gansu province is also considering a commercial stockpile plan.

Underscoring the stronger sentiment, ShFE aluminum net speculative short-positioning fell to 20.4% of total open interest as of April 30, from 52.7% on April 2, data from brokerage Marex Spectron showed.

Outside China, the picture is different.

Three-month aluminum on the London Metal Exchange (LME) has fallen every month this year and 18% year-to-date – the weakest performance of all base metals.

That divergence has opened a rare arbitrage window for traders who can bring aluminum into China – or buy LME and sell ShFE contracts simultaneously – with one trader estimating a $10 per tonne profit on Wednesday for June delivery.

However, trade sources and analysts expect the China price strength to be short-lived because of weak global economic growth.

“This month will be critical for aluminum as we wait and see if China’s market can continue its recovery, and whether demand growth from the rest of the world finds a bottom,” ING analyst Wenyu Yao said, estimating a 1.5-million-tonne surplus for aluminum globally in 2020.

“I don’t expect the rally to last long. There is plenty of aluminum, more than enough, I would say, to feed the world,” the second trader said.

($1 = 7.0902 yuan)

(By Mai Nguyen and Tom Daly; Editing by Barbara Lewis)

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