Supply concerns pushed China aluminium prices to a nine-month high this week; LME traded weaker

Disruptions in two of the Chinese primary aluminium smelters pushed SHFE aluminium prices to a nine-month high this week. Though the exact status of both plants is uncertain, there have been enough speculation and the market is buzzing with a potential supply squeeze.

A media report last week said that a wall of one of the Shandong-based group’s aluminium plants was “immediately overwhelmed” by flood water. This statement was issued by Weiqiao Pioneering, which was owned by Zhang family that owns Hongqiao Aluminium.  Hongqiao and Weiqiao are considered to be from the same group of alumina and aluminium-producer. This led to a speculation that Hongqiao’s aluminium production could be affected.

Hongqiao Group however, denied that flooding in the province of Shandong caused any of its smelters to close.

“There was flooding outside the factories but no actual facilities damage,” Honqgiao said in an email statement.

The most-active SHFE October contract climbed to an intraday high of RMB 14,285 per tonne, before it retreated and closed 1.25% higher on the day at RMB 14,200 per tonne on Tuesday August 13. However, the prices consolidated as China Hongqiao Group said the flooding had limited impact on its aluminium production. 

The market was however, left confused about the actual status of aluminium output and transport connections in the flood area.

On August 20, it was reported that Xinfa Group had closed an aluminium production line after an explosion at a plant in the north-western region of Xinjiang. The accident led to the shutdown of around 500,000 tonnes of annual smelting capacity at the plant at north of the Xinjiang capital of Urumqi. Though there has been no official statement on this, a source from the company said this to the media. This capacity closure news has generated further tension in the market shooting SHFE aluminium price to an almost 10 months high at RMB 14,455($2,046.58) per tonne. The contract then fell to lows of around RMB 14,270 per tonne and ended the trading day 0.56% lower at RMB 14,260 per tonne on Thursday.

A possible decline in operating capacity in Shandong and Xinjiang and the upcoming consumption pick-up will prevent downside in SHFE aluminium in the short term, but upside potential is hampered by higher social inventories of primary aluminium ingots in China.

London Metal Exchange (LME) prices have not been affected by China’s incidents. Three-month LME aluminium has been trading within US$ 1765 to US$1,800-per tonne range after hitting a two-and-a-half year low of US$1,745 earlier this month.

The international aluminium market is of the view that a small setback in production will not have much of an impact on the country’s total annual aluminium production and the flow of export. 

China produced 3,050 thousand tonnes of primary aluminium in July 2019, off 2% from 3,115 thousand tonnes in July 2018. The country’s aluminium production increased by just 1.6% last year, a very low pace by China’s standards, and it has fallen by 0.6% during January to July (International Aluminium Institute).