SHFE < 10,000?

Last month at the China Aluminium Forum, I predicted that the SHFE would broach the RMB10,000 mark. In some senses it wasn’t a bold prediction, since the price was hovering at that time around the RMB10,500 mark. But my concern was that demand was now entrenched at lower levels, but supply showed few signs of slowing.

This morning the SHFE got down to RMB10,105. I had thought that resistance would come in the form of some small closures, and some further policy action by Beijing, perhaps an RRR cut or interest rate cut. Those things haven’t happened, and the SHFE price is now poised to slip below this important psychological barrier.

At RMB 10,000, there aren’t many smelters making money. Those of you who read our recent Cash Cost Curve analysis for Q3 will know that even at RMB10,500 less than 10% of China’s aluminium capacity is above water on a cash basis. Shandong’s Hongqiao group tell us that their breakeven point is around RMB9,000 though we can’t know what they include or exclude in that figure. Perhaps Xinfa or East Hope is at or near breakeven.

Prices are now at the lows last seen during the depths of the Global Economic Crisis.

With the SHFE price sitting so low, two things will happen. The low SHFE price will further exacerbate the gap between subsidies given and the cash cost for many smelters. Those who seek to keep plants open will have to fork out even more money. Second, the low price will have an impact on the LME. If the spread between the LME and the SHFE opens too wide, more Chinese metal will be exported, with or without the 15% export tariff. Eventually the LME will feel the gravitational pull of the SHFE, and London will also slip. At close last night, London was at US$1483, so it could be argued that the SHFE is already influencing the LME. Remember the LME should be enjoying a bounce caused by Alcoa’s recent announcement of more closures.

You might say that there is a third outcome from a low SHFE - closures of Chinese smelters. I didn’t put that outcome in my list because right now we don’t see that there will be a serious correction. As long as the view among smelter operators is that the price will improve once “the other guy” closes, or as long as the funding continues, smelters won’t close. Perhaps it will happen, but to me the first two outcomes will happen before then.