Editorial

【SHMET Analysis】Electrolytic aluminum: LME aluminum price spike making SHFE aluminum strongly volatile

Date Apr 20 2018 14:29:58Source:SHMET
Strategy conclusions: 

The price of LME aluminum oxide and aluminum ingots has skyrocketed under the continued stimulus of U.S. sanctions against Rusal. While domestic increase was limited under the pressure of excess capacity. SHFE/LME arb has hit a new low, with an export profit of aluminum semis reaching $150/tonne. At present, U.S. sanctions against Rusal are still likely to be strengthened and SHFE/LME arb still has a possibility of hitting a historical low, so the reverse cash and carry arb needs to wait a right time.


After the aluminum price rebound, the production profit of the domestic electrolytic aluminum plants is significantly improved, which will stimulate the aluminum plants to speed up the resumption of production and production schedule, causing greater suppression of the aluminum price. At the same time, alumina is likely to rise to 3,000 yuan/ton driven by the spike in foreign aluminum price, which will raise the cost of aluminum plants by 400 yuan/ton, and the production cost of the electrolytic aluminum plants is expected to stabilize.  


It is expected that the social inventory will back to decline this week, and the downstream will return to the market purchase with the stimulation of the peak season. Spot is expected to be within a discount of 130-90 yuan/tonne after the rebound of aluminum price.


Main SHFE aluminum contracts are expected to be strongly volatile between 14,500 to 15000 yuan/tonne, while LME aluminum remains strong.


Fundamentals 


1. Changes in production capacity 

Domestic electrolytic aluminum capacity changes little. In the case of a recovery in profits, the Hennan area’s resumption of production is expected to accelerate. 


2. Stocks

Figure: domestic electrolytic aluminum social stocks were unchanged from last week at 2.231 million tonnes (excluding Xinjiang area) 


Last Thursday, the domestic electrolytic aluminum stocks were 2.231 million tonnes, unchanged from last week. The downstream replenishment volume has slowed after the aluminum price rebound, but it will gradually increase the volumes of purchases after the aluminum price has stabilized this week. It is expected that stocks will continue to fall. 


3. Foreign market

Due to the fact that Rusal’s brand has been restricted by the Exchange, LME c-3m premium was once up to $52/tonne. There are traders who use other brand to carry out delivery arbitrage with Rusal brand, delivering more than 90,000 tonnes of non Russia brands on the LME. In addition, spot premiums in Europe and the United States soared, rising to $495.9/tonne in the United States and $130/tonne(tax unpaid) in Rotterdam, Europe. As a result of U.S. sanctions, traders, represented by Glencore, said they would not trade Rusal’s aluminum in the market, resulting in a rapid decline in the supply of aluminum ingots in the market. The supply of aluminum ingots in the market will remain tight. 




Market structure 

1. Industrial chain profit

The picture shows the profit distribution of aluminum industry chain in Henan province with relatively high cost. With the rebound of aluminum prices, the profits of electrolytic aluminum enterprises have improved significantly. The profit model of our simulation aluminum plants shows that the total profit of the whole industry chain is around 1430 yuan/ton, of which the profit of aluminum plant is 837 yuan/tonne, the alumina plant profit is 290 yuan/tonne, and that of the anode plant is 76 yuan/tonne.  Sub-items:


Electrolytic aluminum plants
Price of thermal coal dropped 5 yuan/tonne to 585 yuan/tonne , the price of fluorinated aluminum decreased by 2000 yuan/tonne, and the price of pre-baked anode fell 300 yuan/tonne, while alumina price rose 60 yuan/tonne to 2790 yuan/tonne, with the total cost decreasing by 94 yuan/tonne to 13624 yuan/tonne. It is expected that there will still be some reduction in the prices of thermal coal and pre-baked anode, but the price of alumina will continue to rebound and the production cost of the aluminum plants will stabilize and rebound. 


Alumina plants    
Driven by cost support and a strong rebound in foreign alumina price, the price of domestic alumina has started to rebound and is expected to reach 3000 yuan/tonne. Due to the fact that Norsk Hydro’s Brazil alumina plant is still not reproducing and that the recent US sanctions against Rusal has made Rusal’s aluminum plants in Finland and Jamaica facing a force majeure delivery problem, foreign alumina price surged to $556.67/tone and it is said that the market has started quoting about $600/tonne. The inversion of SHFE/LME spread makes alumina traders in china to consider re-exporting alumina to Australia to ease the domestic supply pressure. 


Accessories plants    

As in Shandong province, the pre-baked anode in other regions was also reduced by 300 yuan /tonne to 3600 yuan/tonne. The profit of Pre-baked plants is near cost line. With the further release of pre-baked capacity, the price of pre-baked anode will continue to fall under pressure. The price of aluminum fluoride dropped 2000 yuan/tone to 10000 yuan/tone, with the price of cryolite remained unchanged at 6000 yuan/tonne.



(2) SHFE/LME arb

SHFE/LME aluminum prices are obviously differentiated. LME aluminum price hit the biggest weekly gain of 11% after the news of US sanctions against Rusal continue to ferment, while SHFE aluminum is limited by domestic fundamentals, with an increase of just 3%. Import losses of domestic spot electrolytic aluminum rapidly expanded from a loss of $290/tonne to $560/tonne and the export of aluminum semis from a loss of $80/tonne to a profit of $165/tonne, with SHFE/LME arb reaching a new low.    


Domestic exports of aluminum semis were 452,000 tonnes in March, an increase of 42,000 tonnes yr/yr and an increase of 82,000 tonnes on a sequential basis, with the export of aluminum semis in the whole March quarter rising 20% yr/yr. This shows that exporters of aluminum semis are stepping up their exports to the United States prior to the imposition of anti-dumping duties in the case of higher export earnings. Some exporters of aluminum semis said that shipments to the United States have fallen sharply since late March. According to SMM, amount of the falling shipments are about 30,000 tonnes. Of course, aluminum semis export profits have improved significantly in the near future and the export of aluminum semis in April still has a stable rise. 

On the whole, current arb is at low level once again, but the likelihood of further US sanctions against Rusal remains. SHFE/LME arb still has a possibility of hitting a historical low, so the reverse cash and carry arb needs to wait a right time.

 

Position holdings

 





SHFE aluminum holdings increased slightly from last week to more than 800,000 lots, while LME aluminum holdings increased sharply by 35,000 lots to 735,000 lots from last Friday. 


Strategy

The price of LME aluminum oxide and aluminum ingots has skyrocketed under the continued stimulus of U.S. sanctions against Rusal. While domestic increase was limited under the pressure of excess capacity. SHFE/LME arb has hit a new low, with an export profit of aluminum semis reaching $150/tonne. At present, U.S. sanctions against Rusal are still likely to be strengthened and SHFE/LME arb still has a possibility of hitting a historical low, so the reverse cash and carry arb needs to wait a right time.


After the aluminum price rebound, the production profit of the domestic electrolytic aluminum plants is significantly improved, which will stimulate the aluminum plants to speed up the resumption of production and production schedule, causing greater suppression to the aluminum price. At the same time, alumina is likely to rise to 3,000 yuan/ton driven by the spike in foreign aluminum price, which will raise the cost of aluminum plants by 400 yuan/ton, and the production cost of the electrolytic aluminum plants is expected to stabilize.  


It is expected that the social inventory will back to decline this week, and the downstream will return to the market purchase with the stimulation of the peak season. Spot is expected to be within a discount of 130-90 yuan/tonne after the rebound of aluminum price.


Main SHFE aluminum contracts are expected to be strongly volatile between 14,500 to 15000 yuan/ton, while LME aluminum remains strong.


Edited by SHMET

【SHMET Analysis】Import window for lead expected to open with limited space for spot zinc premiums to grow

Date Apr 20 2018 09:03:02Source:SHMET

·Domestic lead supply and demand analysis

On supply side, for rectification reason most secondary lead manufacturers in Taihe district, Anhui this week halt production which has occurred and exerted impact since mid March. Only two major producers are spared from the impact of this rectification. Marginal change of secondary lead next will depend on the investment and operation of some newly-built secondary lead factories, including the expected further incremental production of Zhongqing Co., in Shandong and progress made on investment and operation of secondary lead production line in Minshan Mount. The incremental production from these new manufacturers is expected to offset the reduced output resulted from production halt in Taihe, Anhui.

Recent high frequency data shows spreads between primary and secondary lead are stable at 200yuan/t, with profit of secondary lead again turning into a loss of around -200yuan/t. All this evidence suggests abundant supply of secondary lead while the metal’s further release is restricted to its loss, which is in favor of supply side.

Recent high frequency data shows spreads between primary and secondary lead are stable at 200yuan/t, with profit of secondary lead again turning into a loss of around -200yuan/t. All this evidence suggests abundant supply of secondary lead while the metal’s further release is restricted to its loss, which is in favor of supply side.

   On domestic inventory, SHFE stocks of 26,605t are slightly up by 1,197t, with overall stocks at low levels. Expect domestic lead stock can be slightly piled up from April to May.

   Overall lead’s off-season development remains the following pattern: Environmental constraints on secondary lead- Supply reduction - Inventory reduction - Higher lead price - Recovered profits - Supply increased - Lead price dropped. Considering the direct impact on secondary lead’s profits by restrictions to lead price, it is believed unilateral of lead price would remain stagnant and unlikely to drop.

·Market analysis of Zinc

Rumor of SRB’s bear sales of 50,000- to 60,000-ton lead last week has not yet been confirmed but it led to price breaking down on the very day it broke, contrast to reasonable magnitude of previous purchasing or bear sales. Whether the news is true shows the pressure of bear sales has been lasting for a while. Many investment institutions have firmly believed it’d be better to short sell zinc since 2018.

For a mid- to long-term cycle, around the next two to three years, the growing supply of zinc ore and zinc concentrates will turn the fundamentals into surplus. As demand side is similar to other nonferrous metals the zinc is better for short selling based on its expected supply increase.

Low-level zinc stocks are an inevitable problem to be solved in a short term, as inventory globally is facing further de-stocking.

While unilateral price can suggest a tendency in mid to long term, in a short term price mainly faces situations such as extended backwardation and growing price ratio.

As for fundamentals, changes of unilateral zinc price impact supply and demand mainly through profit level of industrial chain. The speed of domestic de-stocking mainly relies on whether supply will be further contracted.

As for profits of smelters, based on a cash cost of 4500yuan/t the BEP is at 22500-23000yuan/t which is close to current zinc price in general. Backwardation and spot premiums will continue to rebound should smelters reduce production in larger scale. Believe by April 16, B-May reaches 180-200yuan/t. Space for premiums to go up is believed to be limited if smelters remain in current supply.


Until April 13, imported spot zinc generates a loss of around 70, domestic marginal change focuses on whether there is any newly imported zinc. Late-stage import P&L continuing to contract can still be taken to monitor the exact time when spot Borrow gains profits.

In conclusion, there are chances for unilateral market to correct at low level and slightly rebound, while increasing longs is not suggested. Backwardation and spot premiums will continue to rebound should smelters reduce production in larger scale. Import P&L continuing to contract can still be taken to monitor the exact time when spot Borrow gains profits.



Edited by SHMET

Nickel – big difference between actual purchasing price and selling price, with transaction being light

Date Apr 19 2018 15:47:04Source:SHMET

With regards to NI FP, offers in Shanghai bonded zone keep standing at the range of $230-$250, so is premiums for CIF. The SHFE Spot/LME 3M was at 6.92 and that for 3M SHFE/LME 3M at 6.96. Russian Ni registered a loss of RMB9651 in spot (2%of import tax) and a loss of RMB9297 3M forward.

 

Nickel import losses are expanding and the buyer has a weaker purchasing willingness. The purchasing price is lower than the desirable price of the seller, with market transaction being depressed. The quotation of Russian nickel is holding firm at $245/tone and that of B/L is basically maintained at around $240/tonne. There are few cargoes negotiable in the market and the demand is also weaker. 

Edited by SHMET

Zinc – overall market transaction activity was not significantly improved from yesterday

Date Apr 19 2018 15:46:20Source:SHMET

Zinc Premiums in Shanghai bonded warehouse quoted at $135-$145/mt and CIF shanghai stood at $145-$155/mt. Today LME C-3m valued at $16.5C, while the SHFE Spot/LME 3M arb also retreated to around 7.64, the spot import loss to RMB322/mt and expanding loss slightly in forward market, around RMB839/mt lost. Custom duty exempt brands, Australian and Korean, still generate quite a gain of RMB24/mt in spot import market, but it may lose RMB613/mt in forward import.

 

Market quotation has stabilized and buyers have weaker purchase willingness. There is a big difference between actual purchasing price and selling price, with trading volumes being limited. The downstream purchase according to their needs and the overall transaction activity in the market was not significantly improved from yesterday.

 

Edited by SHMET

Aluminum – offer of suppliers is high, with trading volumes being weaker

Date Apr 19 2018 15:45:49Source:SHMET

Traders reported that spot premiums CIF shanghai remained at level $120-$140 as usual, so did the physical warrants. LME C-3m valued edged to $3.5B. SHFE Spot/LME 3M arb flattened out at 6.10, suggesting importing may lose around RMB4760/mt in spot market and RMB4457/mt in forward market.

 

There is an increase in the number of negotiable aluminum ingots, but there are few offer for warrants. Suppliers’ offer is high, but the transaction is not good. Most market people are on the sidelines and the buyers seek for the low price cargoes, with overall trading volumes having no increase significantly. 

Edited by SHMET
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