China body sounds alarm about growing speculation in aluminum markets

The growing speculation in the aluminum market and unreasonably elevated prices have emerged as major concerns, the China Nonferrous Metals Industry Association said Sept. 1, adding that the primary aluminum supply situation is not as bad as the market fears.

CNIA's statement came after a series of output cuts at key aluminum regions in China came to light, as smelters have struggled recently in maintaining their production lines amid power shortages and a growing pressure of meeting energy targets set by authorities.

Since the last few months, aluminum prices have risen sharply because of supply concerns.

CNIA said speculators in the aluminum market should not underestimate the government's determination in using policies to stabilize commodity prices.

Markets are reading too much into the energy consumption targets set for Inner Mongolia, and the power usage limits in Yunnan province and Guangxi Zhuang Autonomous Region, leading to higher aluminum prices, the association said.

The general market view so far showed tighter supply remains in the aluminum market.

However, CNIA emphasized on robust production in China and recent stock releases from state reserves.

China's primary aluminum smelters have maintained their production at elevated levels since the fourth quarter of 2020, CNIA said.

China's primary aluminum output and imports totaled 22.89 million mt and 930,000 mt, respectively, in the first seven months of 2021, the association said. The output and imports were up 9.5% and 167.6%, respectively, year on year, it added.

Moreover, China has released 140,000 mt of primary aluminum into the markets in July. Therefore, the actual supply of primary aluminum is not as tight as seen by markets, CNIA said.

Giving reasons why current aluminum prices were not at reasonable levels, CNIA said China's primary aluminum supply has not shown any obvious signs of shortages.

Production costs also are trailing actual market prices, while consumption remains a bit on the softer side to support such elevated prices, the association said.

Risks to downstream users

CNIA said there were risks that primary aluminum prices could fall sharply in the short term once substitute materials flood the markets, after downstream consumers showed an inability to afford such high prices and as monetary policy tightens.

The most active aluminum contract for October delivery on the Shanghai Futures Exchange closed at Yuan 21,075/mt ($3,258/mt) Sept. 1, down Yuan 310/mt, or 1.5%, from the previous close.

The contract has been hitting fresh record highs since the last few weeks, reaching Yuan 21,495/mt on Aug. 30 -- the highest since May 31, 2006. Prices were driven by market talks around Guangxi asking local smelters to curb their output in September.

The contract has been hovering at a key resistance level of Yuan 19,000/mt since July 22, staying firm due to the tight market situation.

Meanwhile, China's National Food and Strategic Reserves Administration has started the next bidding round for releasing metal stocks in the third batch. The first two bidding events took place in July.

The administration on Sept. 1 invited bids for 70,000 mt of aluminum ingot reserves, with the highest bidding price at Yuan 20,271/mt in Maanshan city of Anhui province, market sources said.

This bidding is only open for downstream processors and manufacturers, as it targets to undercut cost pressures for these end-users at a time of strong prices.