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Highlights

China's primary aluminum prices extended gains on the back of improved sentiment in the base metals market and strong demand, which opened the arbitrage window for the country to import, sources told S&P Global Platts this week.

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Shanghai Futures Exchange's most active aluminum futures contract advanced for a sixth straight day to Yuan 12,875/mt ($1,812/mt) Wednesday, the highest since March 12. The contract rose Yuan 25/mt, or 0.2% on the day, and by Yuan 1530/mt, or 13.5%, compared to Yuan 11,345/mt on March 23, the lowest since March 17, 2016, the SHFE data showed.

The spot prices of primary aluminum at Chinese domestic market also moved above Yuan 13,500/mt, sources said.

"Smelters are reluctant to offer on the spot market, expecting the profit would continue to enlarge. The healthy financial status among most of the smelters since the second quarter has slowed down their pace to offload the aluminum cargoes, especially on an ascending market," said a smelter source based in Southern China.

"On the other side, large-scaled downstream processors and traders are actively purchasing stock from the spot market, which makes the market even tighter," he added.

Aluminum imports jump

As LME prices extended losses due to the coronavirus pandemic globally and SHFE prices rebounded following a recovery in April domestic demand, the gap between LME and SHFE prices further widened, opening China's arbitrage window to import.

The import profit margin continued to increase, which will attract more import volumes in the coming weeks, sources said.

LME three-month aluminum official prices reached $1,486.5/mt May 20, which was $325.5/mt lower than the most active aluminum futures contract on SHFE on the same day, S&P Platts calculations showed. The gap between LME and SHFE prices was only around $29/mt on March 23.

"In the first three weeks of May, we've observed about 300,000 mt of aluminum ingots being imported to China market. The profit is around a few hundred calculated in yuan, which is quite attractive to some international traders," said one trader source.

"It takes time for these imported cargoes to flow to the spot market, thus that will not immediately ease the supply tightness," added the source.

However, sources also pointed out that domestic aluminum inventories are not at lower levels compared to the last several years.

"The east and south [China] is going to enter the rainy season in June, which will depress the aluminum demand. The imported aluminum might further increase the inventory level by then," said a Shanghai-based trader source.

China's primary aluminum stocks on the SHFE declined for eight straight weeks to reach 352,342 mt as of May 15, across warehouses in Shanghai, Guangdong, Zhejiang, Jiangsu, Shandong, Tianjin, Henan, Liaoning and Chongqing. This was down by 181,652 mt or 34% compared to the highest level of the year on March 20, but up 167,215 mt or 90.3% compared to the December 27, 2019 level.

The imports of lower seaborne materials could weigh on Chinese primary aluminum prices in the coming months, as domestic production continued to increase, downstream demand lacked momentum and export orders declined due to the pandemic outside of China, sources estimated.