BEIJING/MELBOURNE (Reuters) – Chinese aluminum prices have skyrocketed amid a crackdown on overcapacity, but traders say final demand is weak and cuts may not be as big as expected. Trading data shows some are bracing for a correction.
China, the world’s largest producer of the metal, is forcing illegally built plants to close and pursuing others that have not met environmental targets as it pushes to clear its skies and shore up loss-making industries.
Analysts see 3-4 million tonnes of smelting capacity closures this year, equal to about a tenth of China’s production. Just last month, China’s top aluminum region Shandong ordered 3.2 mln tonnes offline.
Expectations of a supply shortfall have seen aluminum prices on the Shanghai Futures Exchange (SHFE) skyrocket 16 percent since Aug. 1. Open interest has ballooned by 50 percent to a record high above 910,000 lots.
But traders and analysts warn that the market has climbed too far, too fast, which has scared off physical consumers.
“Considering the current situation of the physical market … I think [the speculators] are crazy,” said one trader in Shanghai, noting weak downstream demand.
“China’s supply side reform is more than expected [but] the reality is inventories are higher, consumption is not good and aluminum rod processing fees are sharply lower,” said a manager at a Chinese futures brokerage.
Bears are betting that booming prices will encourage some plants to restart, while new capacity that has been closed by regulators will be allowed to reopen after winter.
“There’s a lot of hype to it. This is all expectations of massive cuts coming through,” said analyst Ed Meir of INTL FC Stone in New York.
The world’s largest aluminum maker, China Hongqiao Group Ltd said last week it would cut more than 2 million tonnes per year of “outdated capacity”, but that new capacity would keep its total at 6.5 million-7 million tonnes.
“They are keeping their overall production target intact. If you’re not going to see any cutbacks overall, how is that bullish?” said Meir.
At the same time, producers are ramping up output.
China’s aluminum production hit its second highest on record in June while SHFE stocks are at four-year highs. One trader at a global merchant in Asia said she expected China’s stockpiles to grow from 1.2 million tonnes now to 2 million tonnes by year end.
Bears are boosting positions in the options market, with a surge in put interest at strike prices well below London Metal Exchange…