Aluminum Seen Riding for Fall as Chinese Speculators Pile In

  • Shanghai prices have detached from fundamentals, analysts say
  • Rebound to 10-month high seen unwinding production cutbacks

After steel comes aluminum.

Futures traders in China have flocked to the lightweight metal used in beer cans and car parts, stoking a rally and setting the market up for a potential slump in the second half as smelters fire up new or idled smelters.

Aluminum is trading around a 10-month high on the Shanghai Futures Exchange after volume more than quadrupled in four days to about 1.04 million contracts on Monday, the most since December. That echoes the performance of steel reinforcement bar last week, when prices rose 20 percent in four days as trading ballooned.

While strong demand and tight supplies in the first quarter drove up aluminum futures, the risk is growing that prices will climb too far, according to analysts at CRU Group, AZ China Ltd. and Bloomberg Intelligence.

“There’s momentum building on the Shanghai exchange even though the fundamentals are not strong enough,” Eoin Dinsmore, a London-based aluminum consultant at CRU Group, said by phone on Monday. “The higher price action is going to more than undo any improvement in fundamentals.”

Restocking Cycle

Raw materials used in property and manufacturing in China have rallied as a rebound in construction coincided with low inventories after weaker production at the start of the year. Demand for aluminum expanded 8 percent on year in the first quarter, compared with 6 percent growth in the previous three months, according to CRU. Output of primary aluminum fell 2 percent.

What began as a “normal, mature restocking cycle” spurred by a burst of government-backed credit morphed into what looks like a speculative rally that could end badly, said Paul Adkins, managing director of consultancy AZ China in Beijing. Prices “beyond comprehension” will force more plants to consider restarting, adding to the 1.1 million tons of capacity coming back, he said.

“I would say that the guys who are still closed would be wise to wait and see what happens, and whether the price is going to hold,” Adkins said.

The top 20 brokers on the Shanghai Futures Exchange held net long positions -- or bets prices will rise -- totaling 30,025 contracts at the close of trading Monday, almost double a week earlier. Aluminum futures in Shanghai fell 0.7 percent on Tuesday after closing at 12,885 yuan ($1,984) a ton a day earlier, the highest level since June.

“The market was supportive of an increase in aluminum, but not to this extent,” Yi Zhu, an analyst with Bloomberg Intelligence in Hong Kong, said by phone. “March and April are usually strong months for demand with construction and infrastructure getting back to normal, so I would say starting from the second half of June prices may go down.”

— With assistance by Martin Ritchie

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