CRU: LME Aluminum is Off 8% from its May Peak

Chinese Market Not the Driver it Used to Be

At the start of May, the SHFE price reached its highest level in 13 years following a 10% rally straight after the week-long Labor Holiday. The move forced Chinese authorities to issue a statement urging members of the futures exchange to operate “in an orderly manner” and avoid “excessive speculation.” The news caused the SHFE price to drop 10% and although support has since been found at RMB18,000 /t, gains have been shy.

The accompanying chart suggests open long positions on SHFE are on the rise again, but given the higher scrutiny from authorities, we expect those to be linked to physical hedging. Nevertheless, without the support of speculative bets it is unlikely SHFE becomes again the powerful bullish force it was, at least in the short-term.

China to Sell Non-ferrous Metals from Reserves

On June 16, the Chinese government confirmed plans to offer copper, aluminum and zinc from its national reserves to processing and manufacturing companies. The National Food and Strategic Reserves Administration said it intended to sell its reserves in small batches via open auctions. For aluminum, the first auction will take place on July 5-6 for a quantity of 50,000 t. The plan is expected to last until the end of 2021. For now, tonnages are limited and so is the impact on SHFE. However this remains a potential downside risk to SHFE if the tonnages announced are more important. CRU estimates total reserves to amount to 777,000 t, but other market sources have estimated reserves to be higher.  

Higher Inventories and What it Could Mean to Chinese Imports

The level of Chinese imports has been a major factor behind the recovery in the LME price. However, so far in 2021, they have weakened compared to 2020 as seen in the accompanying chart. Given it is unlikely we see SHFE rising to new multi-year highs in the second half of 2021, the ingot import arbitrage into China should remain closed. Moreover, the release of strategic reserves to the Chinese physical market could mean fewer imports are needed. The lower Chinese imports are already putting pressure on the MJP spot premium, currently trading $30 /t below MJP Q3 that was fixed at $185 /t at the start of June.

The Dollar Changes Direction as the Fed Switches Its Tone

A major reason behind the acceleration of the rally between April and June was the weaker U.S. dollar. This was due to the Fed downplaying risks of inflation despite demand recovering rapidly. That tone changed dramatically last June 16 as the Fed decided to push forward its plan to start increasing interest rates, with the first hike expected in 2023. The move caused a steep rally on the U.S. dollar, which in turn pushed metal prices lower.

With the dollar becoming less of a reliable force, the aluminum market is now relying on its own market fundamentals. We think there are many reasons to believe the rally will resume in the near future.

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