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China’s aluminium output seen strong despite falling prices

Falling aluminium prices that have squeezed producers’ profit margins in recent months will do little to slow production in China given the high costs of downtime and hopes for an overseas demand surge.

The expected steady supply from China, the world’s biggest producer of the light metal, should pressure domestic prices in the near-term until domestic demand improves while helping to fill overseas demand, especially in Europe and the United States.

State-backed metals research house Antaike forecasts China’s aluminium output will reach 10.42 million tonnes in the third quarter and 10.54 million in the fourth quarter, up from 10.11 million in the second quarter.

The most-traded August aluminium contract on the Shanghai Futures Exchange SAFc1 sank to 17,300 yuan ($2,557.62) a tonne on July 15, the lowest since April 2021. That plunge has dropped margins from producing the metal to minus 650 yuan per tonne from as much as 5,500 yuan in March, according to data from Macquarie

Even when operations become unprofitable there is a broad consensus that producers are unlikely to scale down or halt their production.

“Smelters are still on track to ramp up production and or release new capacity following the money they made in 2021 and the first quarter this year,” said Wang Min, an aluminium analyst at CRU Group.

CRU estimates around half of China’s aluminium smelting capacity would be cash-negative at a Shanghai Futures price of 17,225 yuan a tonne, based on its China cost curve in the second quarter of 2022. The August contract was at 18,090 yuan on Wednesday.

Thanks to China’s relaxed electricity controls over energy-intensive sectors this year, aluminium supply posted a gradual increase with production ramp-up and new launch of capacity in producing regions including Yunnan and Gansu provinces.

“Many producers just came back to the market with easing electricity controls and they won’t easily halt production given the massive costs of idling furnaces and restarting,” an aluminium producer source said.

“And the good profits they made over the last year could help to sustain their production even in a non-profitable environment.”

Domestic demand is also expected to pick up at the end of third quarter followed by an easing in the fourth quarter, Antaike said.

The current bearishness has led to a drop of speculative activities in the spot market.

“It’s hard to tell where the bottom is, cost is one factor but it’s more about supply and demand balance as well as the macro economic performance,” a trader said.

Outside of China, aluminium production, which is an energy-intensive process, has been curtailed amid a surge in electricity and energy prices, particularly in Europe.

The export opportunities of aluminium products has also incentivised Chinese producers to maintain their production.

China customs data showed unwrought aluminium and aluminium products output in the first half of 2022 surged 34% year-on-year to 3,509,079 tonnes.
As of Wednesday, LME aluminium inventories MALSTX-TOTAL tumbled to a mere 304,125 tonnes – the lowest in nearly 22 years – from 1.97 million tonnes a year earlier. ShFE inventories of the metal AL-STX-SGH were hovering near their lowest since January 2020 at 191,198 tonnes.
“You’ve got a really really tight market in Europe and relatively tight in the United States,” said Geordie Wilkes, head of research at Sucden Financial in a July 19 webinar, adding that the energy issue would support aluminium prices up until the first quarter of 2023.

He expects the LME aluminium price to range in between $2,300-$2,600 a tonne in July to September.
Source: Reuters (Reporting by Siyi Liu in Beijing and Mai Nguyen in Hanoi; Editing by Christian Schmollinger)

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