COLUMN-Shanghai aluminium rattled by reports of smelter outages: Andy Home
(Repeats Thursday column with no changes to text)
* The opinions expressed here are those of the author, a
* Shanghai aluminium price, volumes and open interest: https://tmsnrt.rs/2NodXIj
By Andy Home
LONDON, Aug 22 (Reuters) - The price of aluminium in
Shanghai traded at nine-month highs this week on the back of
Chinese smelter outages.
The Shanghai Futures Exchange (ShFE) contract has seen
volumes accelerate and open interest surge on the higher prices,
suggesting local speculators may be getting in on the action.
In London the price is unmoved. London Metal Exchange (LME)
three-month aluminium has been treading water around the
$1,800-per tonne level after hitting a two-and-a-half year low
of $1,745 earlier this month.
The London market is apparently more concerned with the
deteriorating macro picture and betting that smelter hits in
China won't make much difference to the country's flow of
The disconnect between the two markets is instructive but
international players ignore "local" problems in China at their
The ShFE's most active contract hit a nine-month
high of 14,455 yuan per tonne this week amid a sharp pick-up in
Last week's volumes of 1.2 million contracts were the
highest in a year, while open interest has mushroomed to 877,524
contracts from 666,706 in the space of two weeks.
The last time the contract was this active was in the first
quarter of 2018, when aluminium was retreating from a price
spike above 18,000 yuan.
Aluminium tends not to attract the same level of speculative
interest as other Shanghai metals such as steel rebar and nickel
but it's clear it's just moved on to the investment radar.
Reports of at least two significant smelter outages have
triggered the new-found interest in aluminium. The exact status
of both plants is uncertain, meaning there is plenty of
speculation wrapped up in this speculative activity.
Hongqiao Group, the world's largest aluminium
producer, has denied flooding in the province of Shandong
earlier this month caused any of its smelters to close.
However, in a seemingly contradictory statement, Weiqiao
Pioneering, part of the Hongqiao Group, said a wall of one of
the group's aluminium plants was "immediately overwhelmed" by
water from the Xiaofu river.
The market is left scratching its collective head as to what
is really going on in terms of output and transport connections
in the flood area.
There is a similar lack of clarity about Xinfa Group's
operations in the northwest province of Xinjiang.
The company has made no official comment on reports that it
has closed 500,000-tonnes per year of capacity after an
explosion at a plant north of the provincial capital of Urumqi.
But the consensus among industry watchers in China is that
something serious has happened at the smelter, leaving it out of
action for at least a couple of months if not longer.
Inevitably, the lack of official comment on either incident
merely serves to fan the speculative fires.
PRODUCTION PLATEAUS, STOCKS DROP
The smelter hits come against a backdrop of flat-lining
aluminium production in China.
The country was the driver of rising global output through
much of this decade but the growth engine has stalled.
National production increased by just 1.6% last year, a very
low pace by China's standards, and it has fallen by 0.6% in the
first seven months of this year, according to the International
Annualised production of 35.9 million tonnes in July was a
million tonnes lower than in December 2018.
Poor margins, environmental inspections and broader
structural reform of the aluminium smelter are all in the mix.
Visible stocks in China, meanwhile, have been falling for
many months. Inventory registered with the ShFE closed at
387,663 tonnes last week, down by 284,522 tonnes on the start of
the year and a long way off last year's peak of 993,207 tonnes.
This may in part be a structural phenomenon as ever more
Chinese smelters produce more valuable semi-manufactured
products rather than commodity metal.
It's worth noting that the ShFE contract is backwardated
across the front part of the forward curve, with nearby months
trading at higher levels than further forward months.
The LME market, by contrast, is in comfortable contango and
has been so for much of the year.
In other words, the Shanghai market currently seems to be
much more sensitive to disruption in the primary metal segment
of the supply chain.
The focus outside China, by contrast, remains on the robust
flow of China's semi-manufactured ("semis") exports.
Semis exports rose by 4% in 2017 and by 24% in 2018 and were
up another 8% at 2.65 million tonnes in the first half of 2019.
This export tide serves to depress demand for primary
aluminium everywhere else and its continued strength is one of
the reasons why Western investors don't much like the aluminium
However, analysts at CRU have consistently argued that
Chinese semis exports also serve to mask a growing deficit of
primary aluminium in the West, even if it's not visible from LME
stock movements, which are as much to do with storage as
A general awareness that there is much more aluminium
sitting in off-market storage has left the market inured to the
sort of smelter hits currently being experienced in China.
However, there is a risk of complacency, particularly if, as
CRU claims, non-visible shadow inventory has been steadily
This leaves the global aluminium supply chain ever more
dependent on China, which accounts for around 55% of global
And unlike in the West, where smelter outages are few and
far between, China's sprawling aluminium sector seems a more
volatile mix of short-term and structural disruption.
The LME aluminium market isn't pricing in this sectoral
instability because of the comfort cushion of China's exports.
But if refined metal stocks are declining in both China and
the rest of the world, it may not be long before smelter outages
in China impact the London price just as much as they rattle the
($1 = 7.0834 Chinese yuan renminbi)
(Editing by Kirsten Donovan)
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