China Securities Journal

The state of high inventory, high profit and high price in the aluminum industry chain has seen some new changes at present: the inventory has been reduced slightly, the overall price is stable, but the gross profit is falling sharply.

Relevant data showed that the current electrolytic aluminum latest social inventory decreased by 22,000 tons compared with last week, to 1.684 million tons. The spot price of aluminum is quoted at 16,100 yuan. The latest average cost of domestic electrolytic aluminum smelting enterprises is 15,800 yuan/ton. Based on this, the gross profit of electrolytic aluminum industry is only 300 yuan/ton, and the gross profit rate drops sharply.

Analysts pointed out that the main reason for the decline in profits in the electrolytic aluminum industry is the sharp rise in the prices of raw materials such as alumina, pre-cultivated anode and aluminum fluoride, and the year-on-year increase in the prices of some raw materials was more than 100%. The effect of production cut by enterprises may not appear until after November 15, and at the same time, new capacity is still being put into production. Therefore, in the short term, production is still in the stage of increasing, and it will take time for the situation of high inventory to change. Therefore, prices are expected to maintain a high and volatile situation. To continue to rise, need to wait until next year to usher in the "gold, silver and four" consumption season.

High inventory high price profit fell sharply

The latest data show that domestic electrolytic aluminum latest social inventory of 1.684 million tons, 22,000 tons less than last week. The latest average cost of domestic electrolytic aluminum smelting enterprises is 15,800 yuan/ton. Based on the current latest aluminum price, the gross profit of electrolytic aluminum industry is only 300 yuan/ton, and the gross profit rate falls sharply.

"Since last Thursday, social inventories have begun to show signs of a turning point, and the impact of supply contraction on inventories has begun to show. With the subsequent heating season production limits, inventory is expected to decline further." Cinda futures metal researcher Chen Minhua said.

Bank of China International Futures analyst Liu Chao pointed out that the inventory decline is mainly caused by the decline in China's electrolytic aluminum production. In September this year, the output of electrolytic aluminum was 2.61 million tons. In June, the output of China's electrolytic aluminum was 2.93 million tons. Due to the impact of supply-side reform and production restriction, enterprises reduced production, resulting in a 10% decline in output. The main reason for the decline in profits of electrolytic aluminum industry is the sharp rise in the prices of raw materials such as alumina, pre-prepared anode and aluminum fluoride, and the year-on-year increase in the prices of some raw materials is more than 100%.

"Alumina prices have jumped from 2,500 yuan/ton in mid-August to 3,700 yuan/ton today, supported by tight supplies of domestic bauxite in Henan, Shanxi and other provinces. As the heating season is approaching, it is expected that factors affecting the price of alumina will continue, alumina supply will maintain a tight pattern, the price is expected to maintain strong." "Mr Chen said.

In August, alumina production was 5.864 million tons, down 164, 000 tons from July, according to Cinda Futures. The cumulative output from January to August was 48.812 million tons, up 17.5% year on year. Since September, domestic alumina supply is tight, due to domestic bauxite supply tight and heating season production limits and other multiple factors, tight pattern is expected to maintain.

According to ALD data, in September, domestic alumina started production capacity of 71.33 million tons, the utilization rate of 89.9%, started production capacity continues to decline. Later due to the heating season and domestic bauxite supply constraints, it is expected that the operating rate will further decline.

Chen noted that environmental inspections in northern China had been stepped up and some mines had been closed. At present, some areas in the west of Shanxi Province begin to purchase ore from the south, and Henan Province also has the phenomenon of purchasing and importing high-temperature ore. The overall ore inventory of aluminum oxide plants in the north is tight.

Significant cost support

"The effect of heating season on alumina is significantly higher than that of electrolytic aluminum. According to our calculation, the reduction of production capacity of aluminum oxide during the heating season is 10.22 million tons, which is equivalent to 5.32 million tons of electrolytic aluminum, which is much higher than the reduction of production capacity of electrolytic aluminum of 2.16 million tons based on the production of 1 ton of electrolytic aluminum oxide of 1.92 tons. So heating season alumina prices likely to continue to rise, aluminum cost support is obvious." Topix futures non-ferrous metals analyst Sun Weidong said.

At present, the policy of off-peak production in heating season has been basically fully implemented. According to the calculation of Topix Futures, the production capacity to be suspended in heating season is 2.16 million tons, which will be reduced to 180,000 tons per month in heating season.

"Note that the premise is that the enterprise strictly implements environmental protection policies. "There is a potential risk that local companies may not implement policies as strongly as they would like, as we have been tracking business utilisation," he said. Sun Weidong said.

According to WBMS, global electrolytic aluminium supply was in cumulative short supply by 1.572m tonnes as of August, 191,000 tonnes more than in July. In 2016, there was a shortage of 985,000 tons. On the whole, the global electrolytic aluminum market still maintains a tight balance, especially the overall supply outside China is tight.

According to IAI data, the global output of electrolytic aluminum in September was 4.927 million tons, down 3.09% year on year. Among them, the output of China was 2.606 million tons, down 34,000 tons month-on-month, accounting for 52.9% of the world. The output of other regions in the world was 2.321 million tons, down 78,000 tons month-on-month.

Chen Minhua believes that at present, some of the production capacity in violation of the shutdown, electrolytic aluminum production has declined, although there are new production capacity, but the heating season is approaching, the production will continue to reduce. With the advance of domestic supply-side reform and environmental protection production limits in winter, the global primary aluminum supply will intensify the tight situation.

"With the continuous advance of supply-side reform (the withdrawal of non-compliant aluminum production capacity), the pace of decline in China's electrolytic aluminum production will accelerate." Liu Chao said.

According to the statistics of Zhuochuang Information, by the end of September, domestic aluminum smelting enterprises had a completed production capacity of 45.677 million tons and an operating capacity of 36.632 million tons, with a capacity operation rate of 80.2% (according to the statistics of Zhuochuang in April, China's completed production capacity of electrolytic aluminum was 44.67 million tons and the operating capacity was 38.43 million tons), and the operating capacity declined rapidly.

Liu Chao pointed out that from the impact of the production limit ratio, Shandong and Henan are big provinces of alumina production in China, and the production limit has led to a sharp rise in the price of alumina. At the same time, the production limit ratio of pre-cultivation anode is higher, and the price has continued to rise rapidly. On the one hand, the impact of environmental protection limit is that the inventory of electrolytic aluminum begins to decline, and on the other hand, the cost of electrolytic aluminum rises rapidly.

Supply-side reforms in Shandong and Xinjiang have restricted 4.68 million tons of production capacity. Adding in other regions' illegal production capacity, the total amount of illegal production capacity exceeds 5 million tons. At the same time, the impact of "2+26" environmental production limits has only just begun. Liu Chao said that according to the latest published data, Shandong, Henan, Shanxi electrolytic aluminum environmental protection reduction of total production capacity of more than 2.6 million tons, spot aluminum supply in winter will be further reduced.

Patiently waiting for the "sunny day" of next spring

"On the demand side, it is optimistic that the heating season can be maintained at present. In addition, the heating season of aluminum prices to form a real suppression will be the new production capacity. The abnormal discharge period of electrolytic cell is generally 1 to 2 months, so after the middle of November, there will be at least 1.4 million tons of new capacity with normal production conditions. Of course the exact pace of production will depend on the tonne of aluminium margins, but it will undoubtedly put considerable pressure on aluminium prices. In general, aluminum prices in the short term in a strong shock trend, if again on the 17000 yuan/ton, it may bear greater pressure." Sun Weidong said.

Liu Chao pointed out that autumn and winter are the seasonal production and sales season for aluminum production and consumption, and it is expected that the decline rate of China's electrolytic aluminum production will accelerate from the fourth quarter to the beginning of next year. And demand, aluminum downstream processing materials processing costs stable. Recently, the supply of aluminum rod is tight, the processing fee is increased, and even some types of aluminum rod products are in short supply, and the inventory of aluminum rod has decreased. Scrap aluminum is subject to import restrictions, the price is high, the supply is tight.

From the policy point of view, Liu Chao believes that the supply side reform of the aluminum industry will not relax, but also continue to implement and implement. The future of aluminum production capacity will still be in a strictly restricted environment, the aluminum price will still have a long-term positive. Aluminum prices are expected to maintain a shock upward trend in the fourth quarter, lower than the cost of buying will be more active, enterprises limit output, easy to cause a rise in premium. But too high aluminum prices easy to bring regulatory pressure, shock up or will be the future of aluminum price development of the main tone.

"The effect of production cuts may not appear until after November 15, and at the same time, new capacity is still being put into production, so in the short term, production is still increasing, and it will take time for the situation of high inventory to change, so the price is expected to maintain a high and volatile situation." Guo Qiuying, an analyst at SDIC Essence Futures, said prices would need to wait until next year to usher in the "gold, silver and gold" peak season if they continue to rise. At the same time, according to the environmental protection limit and complex production estimates, next year there is still a gap of 800 thousand tons of aluminum market, so the price is still bullish next year.