Macquarie Research: Chinese aluminium market to continue to tighten

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


China Commodities Call
Chinese aluminium market to continue to tighten


 Chinese refined aluminium production has fallen further in November due to
Beijing’s policy driven energy constraints. Reported aluminium output fell to
1.19mt in November, to an annualised rate of 14.6mt. This compares with 15.2mt
in October and the peak of 18.1mt hit in February (although the February data is
usually distorted by the Chinese New Year). From January to November 2010,
Chinese reported aluminium output was14.9mt, 27% higher YoY.

 Although power restriction should ease significantly from early 2011, we
believe it will be difficult to be able to fully restore power to all aluminium
smelters given the potential for a critical shortage of power over the winter.
Restricted aluminium supply growth in the next 3-4 months, sustainable
demand outlook from China and continuous drawdown in stocks make us
bullish on the aluminium price outlook for the next 3-4 months (we would
become bearish once the aluminium cash price rose to the point that the
forward curve moved into backwardation).
Industry news
 Industry sources suggest that coking coal inventory at China steel mills
decreased to 10-11 days level in Hebei Province from averaging 15-20 days a
month ago. Steel mills expressed concern with logistical issues heading into
winter and are restocking coking coal, with mills also competing with each
other to secure the raw material supply in an effort to satisfy their higher input
level after the New Year. Utilization rates have also improved along with
recent rise in steel price.
 With steel mills’ rising raw material costs, traders are becoming optimistic
about the market prices in early 2011. Chinese domestic plate prices have
been climbing rapidly since mid-December due to mills’ hike their January list
prices. In the meanwhile, CISA data show that China’s plate market inventory
in the country’s 26 major cities had decreased by 11% MoM in Nov.
 Iron ore prices remain stable in China, with 62% Fe at $171/t, up 1.5 WoW by
Dec 22. Issues with weather in Australia, tightening supply of high-grade iron
ore from India, as well as rising demand from Chinese steel mills ahead of the
holiday season have pushed up import offers, while several traders expressed
concern about the possibility of a modest correction in coming days.
 The 21st Century Business Herald reported on Tuesday, citing a research
report by the China Electricity Council, that China may spend RMB11.1tr
($1.7tr) in the next 10 years building electricity infrastructure. China may boost
investment in power grids and electricity stations to RMB5.3tr from 2011 to
2015, up 68% from spending in 2006 to 2010 (this compares to the reported
State Grid budget of RMB1.7tr for the next 5 year plan, up from 1.2tr over the
past 5 years), the newspaper said, citing Wei Shaofeng, deputy director at the
council. Power generation capacity may rise 8.5%pa to 1,437GW by 2015 and
to 1,885GW by 2020, according to the report. The government may need to
raise electricity prices by an average 3.5%pa over the next 10 years to ensure
power producers get an 8%pa annual return on net assets, the report said.