While not alone in seeing ongoing price falls, across the metals sector prices have been in decline for two weeks now. The higher power content of primary aluminum has driven a plunge in prices that have caught many by surprise and still has the potential to go further.
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Aluminum prices fall with falling coal prices
The aluminum price has been undermined by falling coal prices in China following efforts by regulators to curb excessive speculation, hoarding and profiteering from what remains a tight domestic thermal coal market.
If coal prices continue to fall, the aluminum price is expected, for the time being at least, to follow.
The SHFE price is already down to 19,870/mt according to Shanghai Metal Markets (SMM). At one point it hit 19,200/mt, the lowest level since July.
Just as the SHFE led the LME higher in Q2 and Q3, it is now leading it lower. The LME aluminum price fell to the $2600s by the end of last week.
The situation became self-fulfilling, with inputs such as alumina falling as refined metal prices led the way, undermining price support for ingot.
Meanwhile, all eyes are on coal prices.
If they stabilize, then the aluminum price could settle into a range from $2,600-$2,700/mt. However, the key qualifier is whether the authorities are successful in continuing to drive the coal price down further or whether they are content for it to remain where it is this week.
Inventory and power rationing
SHFE aluminum inventory continued to rise in late October. It usually does coming into the winter months and then falls in the spring as demand picks up. But this year’s peak in the spring reached its lowest for some years, as the market went into deficit. That position is unlikely to reverse any time soon, even with the current slowdown in demand.
Downstream enterprises — so-called value-add products produced at rolling mills and extrusion presses — have suffered from the same power rationing as smelters. As the power market has stabilized and supply become better organized, output has picked up a little. Furthermore, demand for primary metal and extrusion billets increased, albeit modestly so far. Lower ingot prices are helping downstream operators, even if they are pushing some smelters into losses.
For the time being, imports are still playing a role in undermining spot prices in China. However, that could change if the LME-SHFE arbitrage window closes as a result of rapid changes in domestic Chinese market prices.
For the time being, most aluminum consumers are rightly holding off from making any more than spot purchases as they wait to see how the current dynamic plays out. Much will depend on coal prices and the ongoing policy on power rationing, both of which will likely become clearer as the month unfolds.
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