The Shanghai aluminum price fell below the integer mark of 10,000 yuan/ton at the end of 2015, and it took less than two years to fill the previous four years. However, from National Day to the present, prices have been falling, from the high point of 17,300 yuan / ton to the current 14,300 yuan / ton, a drop of up to 17%, just two months, basically reversing the first 10 months of gains .

Is there any logic behind the decline in Shanghai aluminum prices?

First, the supply and demand side determines the general direction of price operation, and the fund side is the booster of price movement. In November 2015, the central government proposed supply-side reforms. The prices of bulk commodities such as non-ferrous metals, rebars and coal char began to bottom out. This wave of growth continued into the third quarter of 2017. The whole year of 2016 was the year when aluminum ingots were destocked. The inventory of aluminum ingots fell to a historical low. The spot price premium once soared to 500 yuan/ton. The market pattern of supply in short supply directly pushed up the price of Shanghai aluminum. However, in 2017, the supply and demand pattern of aluminum ingots has changed, and the inventory has gradually accumulated. So far, there has not been a turning point, and the spot price has been in a discounted state. Due to environmental restrictions and funds, Shanghai aluminum prices accelerated. For the bulls, if the price can't be “smuggled into the market” in the short term, the difference of about 100 yuan/ton between the adjacent contracts will increase the cost of the position, while for the shorts, it will reduce the cost of the position. After August, Shanghai Aluminum has not been able to effectively stabilize the platform of 17,000 yuan / ton, the bulls need to be vigilant. Especially after the National Day, the five-year and ten-year treasury futures fell successively, suggesting that the cost of capital in the market is rising and the funding is tight. In addition, consumption is not prosperous, Shanghai Aluminum in the vicinity of 16,500 yuan / ton for two months, the head did not return to the ground.

In contrast, LME's aluminum inventories have been reduced from more than 5.5 million tons in May 2014 to the current 1.1 million tons, and global aluminum ingot supply is tight. The author believes that the price ratio between SHFE and LME will continue to converge, which will help the export of aluminum products to consume domestic aluminum ingot stocks and ease the tight supply of global aluminum ingots.

Second, coal prices can be used as an early warning device for aluminum ingot prices. Among the supply-side reforms, the most affected are some high-energy-consuming industries, including the electrolytic aluminum industry. In the production of electrolytic aluminum, the cost of electricity accounts for more than 40%, and the cost of electricity is ultimately determined by the price of coal. After bottoming out at the end of 2015, both aluminum and coking coal prices showed a wave of upswing. Coking coal prices began to turn around in late August 2017, while aluminum is still rising, but the upward momentum is obviously insufficient.

In summary, the fundamental condition for Shanghai Aluminum's price to regain its upward trend should be that consumption is picking up and inventory is falling, while the spot price discount rate has not been significantly narrowed, inventory is still accumulating, and the fund is tight at the end of the year. The aluminum price is likely to oscillate weakly. However, the Shanghai aluminum trend lags behind coking coal for about two months. Coking coal bottomed out in late October. It can be expected that Shanghai Aluminum will usher in a wave of rebound in early 2018, but in the case of unreduced stocks and low consumption. It is still very difficult to get out of the reverse market.