China is going through a purple patch at the moment, particularly the Chinese aluminum sector.
An early and strong rebound from Q1 lockdowns and significant stimulus investment that has made its way into property and infrastructure activity have boosted demand for all the base metals.
However, aluminum has arguably seen the biggest benefit.
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Chinese aluminum sector sees rising bauxite, alumina imports
A recent post by ING notes China’s strong imports in aluminum-related raw materials — notably bauxite and alumina — continued in the second half.
Bauxite imports in the first 10 months grew by 14% year over year to around 96 million metric tons. Total alumina imports, meanwhile, rose by 205% to 3.1 million tons.
As we reported last month, primary metal imports, while easing now, have been a surprise feature this summer. Total imports in the first 10 months hitting 878 ktons, or 14 times higher than the same period last year, ING reports.
Alloy ingot imports rise
Alloy ingots, or secondary metal ingots, have also shown a surge of imports.
Imports grew from 219 ktons in 2019 to over a million in the first 10 months of this year. However, the reduction in scrap imports tempers this figure. Scrap imports are down almost 680 ktons in the same period as China has grappled with a change in scrap import rules.
Rising domestic output
The surprise is not just the level of imports but the fact it has happened while domestic production has also risen.
Production is up 3.5% year to date. In addition, another 900 ktons of capacity will be coming onstream between now and the Chinese Lunar New Year, according to one report.
Encouragingly, no significant visible inventory has been built in China’s market, ING reports, unlike on the LME. Both ingot and billets stocks appear to remain relatively stable, for now.
The market went through a brief adjustment recently, as investors took profits after prices on the SHFE surged to a nine-year high of Yuan 16,925 ($2,581) per metric ton — last seen in October 2011, according to Reuters.
Having slipped back a few percent, the market is now waiting to see if prices can rise further.
In the short term, there seems little to stop them. Excess aluminum production in the rest of the world is being sucked up by the stock and finance trade. Furthermore, Antaike reports China as being in a slight deficit.
Stock levels in and of themselves are no determinant of price direction, as we have proved in modeling before. Therefore, if stocks rise in the run-up to China’s New Year holidays, it isn’t a harbinger of a price fall.
But as the effects of stimulus measures ease into mid-2021, some of the heat will likely go out of the market unless a vaccine-supported recovery in the rest of the world stimulates a surprise increase in demand outside China.
Most observers are not expecting that outcome before the end of the year.
The timing is uncertain. However, this winter may see the peak for aluminum prices — at least in the medium term.
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