Monthly report format - TransGraph...2016 OND 2016 JFM 2017 AMJ 2017P China Primary Aluminium...

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Medium term outlook on Aluminium

July 2017

2

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3 © TransGraph Consulting Pvt Ltd Slide

Market Recap

– LME Aluminium remained subdued to end marginally down as concerns of higher physical supplies amid increasing production levels weighed on prices

Major price drivers – Improvement in upstream raw material

supplies – Higher Aluminium production levels – Softness in physical premiums – Reports of capacity curtailment in China’s

Xinjiang region – Decline in LME stocks offset by rise in SHFE

& Physical stocks in China

1912 1936 1918 1894 1902 1931 1914 1887

2.11

1.28

-0.91-1.28

2.41

1.55

-0.87-1.44

Mar Apr May Jun Mar Apr May Jun

LME 3M LME CSP

LME Aluminium Price trend

Monthly Avg (USD per ton) M-o-M (%) Change

-9.05 -9.43

-10.58

-2.93

-5.45

-12

-10

-8

-6

-4

-2

0

Feb Mar Apr May Jun

LME Aluminium Cash - 3M Forward spread (usd/t)

TransGraph


Summary price drivers

Price driver Type 1 month 2-3 months

Weight % Score (1-5) Weight % Score (1-5)

LME inventories Stocks 25 3 25 4

Primary Aluminium production –China Supply 20 5 20 3

China Housing/Construction Sector Demand 15 3 15 2

SHFE/China Physical Stocks Stocks 5 3 5 3

Alumina Production –China Raw material Supply 5 4 5 2

Global Auto Production Demand 5 3 5 2

Dollar Index Currency 5 4 5 3

Japan Aluminum Imports/Premiums Demand 10 3 5 3

China Product Exports Supply 5 2 10 1

Aluminium supply-demand balance - 5 4 5 3

Total indexed score: 3.30 2.65

Index score (1-5, 3:consolidation, 1&2:bearish, 4&5:bullish)

TransGraph


Global PMI trends portend to improving global conditions in unison

46

48

50

52

54

56

58

60

Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

Manufacturing PMI

US EU China India

46

48

50

52

54

56

58

60

Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

Services PMI

US EU China India

– US ISM manufacturing PMI for the month of June came in at 57.8, sharply higher than the market consensus and the May reading of 53.5 portending an upbeat growth outlook in US for AMJ

– Euro Zone continues to grow at a good pace and the upbeat manufacturing PMI for June (57.4 vs 57 in May) reinforces the same keeping the broad strength intact in the Euro

– China manufacturing PMI came in at 51.7 for June, higher than the market consensus and the May reading of 51.2, aiding positive growth sentiments in the economy. Services PMI continues to expand and for June came in at 54.9 compared to May’s 54.5

– Indian PMIs although ebbed slightly after recovering from demonetization slump, continues to remain in expansion zone

TransGraph


With personal consumption slowing retail inventories are on the rise in US

– Retail sales have declined but improvement witnessed in capacity utilization rates in the last few months led to building up of inventories which shall eventually lead to manufacturing slowdown in the coming months

– Auto sales remained subdued despite discounts from car makers underpinning the higher inventory levels at the dealer front

18.217.3

18.1 18.3 18.118.7

17.9 17.816.9 17.2 17.0 17.0

-6%

-4%

-2%

0%

2%

4%

6%

10

12

14

16

18

20 US Auto Sales

Total Sales - SAAR (Million Units) Growth YoY

1.85

1.90

1.95

2.00

2.05

2.10

2.15

2.20

2.25

2.30

1.22

1.24

1.26

1.28

1.30

1.32

1.34

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

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-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Oct

-16

Dec

-16

Feb-

17

Apr

-17

Inventory to sales ratio

Total retail Motor vehicle and parts

73.5

74.0

74.5

75.0

75.5

76.0

76.5

77.0 US capacity utilization rates (%)

Manufacturing industry Total industry

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Housing demand remain strong but slowdown likely with increasing monetary costs and higher house prices

– Although sales declined marginally in April, broad strength in housing remained intact in the recent months amid benefits discounts from mortgage lenders

– However, with increasing monetary costs as FED continues to push ahead with its monetary tightening shall lead to credit tightness and is expected to result in slowing sales in the coming months

– In line with the same, even housing starts and build permits have been declining in the last few months underpinning the expected slowdown in US housing

0.570 0.577 0.579

0.548

0.5990.615

0.644

0.5930.610

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

0.40

0.45

0.50

0.55

0.60

0.65

0.70

Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17

US - Housing Market

New Homes Sold(SAAR mln units) 30 yr Mortage rate Avg(%)

1.291.26 1.27

1.30

1.221.26

1.23

1.17

1.33

1.15

1.271.24

1.29

1.191.16

1.09

Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17

US - Housing Market (SAAR mln units)

Building Permits Housing Starts

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Upbeat growth momentum in China

– Aided by fiscal boost, Chinese growth momentum remained stable

– Amid upbeat industrial activity and improvement seen in export momentum price sentiments in commodities shall remain strong 0

2

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-15

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c-1

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Mar

-17

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r-1

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May

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Jun

-17

China industrial production and fixed asset

investment

IP growth (%YoY) FAI growth (%YoY)

-20

-10

0

10

20

30

40

50

60

70 China trade balance (net exports in usd bln)7.3%

7.0% 7.0%6.9%

6.8%6.7% 6.7% 6.7%

6.8%6.9% 6.9%

OND 2014

JFM 2015

AMJ 2015

JAS 2015

OND 2015

JFM 2016

AMJ 2016

JAS 2016

OND 2016

JFM 2017

AMJ 2017

China GDP growth YoY

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Steady raw material prices along with higher Bauxite imports to keep China Alumina production steady for AMJ’17.

– Global Alumina production rose in JFM’17 (China – 31.3%YoY) which could continue to keep primary aluminium production steady in AMJ’17

– Bauxite imports from China which declined in 2016 due to ban from Malaysian exports is expected to remain steady to higher in 2017 with rise expected from Australia & Guinea keeping Alumina production steady for H1 2017.

200

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1300

1400

1500

1600

1700

1800

1900

2000

2100Aluminium and Alumina Price Trends

LME Al Cash (usd/t)Alumina China CIF (usd/t)

0

1000

2000

3000

4000

5000

6000

7000

8000 Chinese Imports of Bauxite (KT)

Bauxite KT

49545057

49545061 5183

5367

58755614

57855961

6321 6403

0.0%

1.8% 0.0% -0.3%

5.8% 7.4%

19.0%

12.2%

19.2%

43.0%

32.0% 31.6%

Production KT Growth YoY

China Alumina Production

TransGraph


Global Primary Aluminium production to slowdown but to remain in positive territory weighing on sentiments.

10

– Supply side reforms seen in China could lead to slowdown in production in upcoming quarters while it could still remain in positive territory weighing on sentiments for short term scenario.

– Stability seen in Alumina production for JFM’17 on steady prices could also keep primary Aluminium production steady weighing on sentiments.

8053 8174 7889 7170 7930 8123 8418 8191 8490

22%

18%

7%

-5%

-2% -1%

7%

14%

7%

-8%

-3%

2%

7%

12%

17%

22%

27%

6500

7000

7500

8000

8500

9000

AMJ

2015

JAS

2015

OND

2015

JFM

2016

AMJ

2016

JAS

2016

OND

2016

JFM

2017

AMJ

2017P

China Primary Aluminium Production

Production (KT) Growth Rate YoY

13360138391400114584 14754145511374214470 14778151431496115050

3.5%

6.0%

8.5%

12.0%10.4%

5.1%

-1.8%-0.8%

0.2%

4.1%

8.9%

4.0%

-4%

1%

6%

11%

16%

12000

12500

13000

13500

14000

14500

15000

15500

JAS

2014

OND

2014

JFM

2015

AMJ

2015

JAS

2015

OND

2015

JFM

2016

AMJ

2016

JAS

2016

OND

2016

JFM

2017

AMJ

2017P

Global Primary Aluminium ProductionProduction (KT) Growth Rate YoY

TransGraph


China New regulations set to potentially impact Aluminium capacities in H2 2017 leading to decline in production supporting sentiments.

– China's "Air Pollution Control" regulation was formally approved and came into effect during the first week of Mar’17.

– According to regulation, China government will force aluminium smelters in four provinces surrounding Beijing to cut output by 30 percent over the winter heating season, which runs from the middle of November through the middle of March.

– Estimated 20 - 30 percent of China's production capacity might be potentially impacted with a hit of around 1.3 - 1.5 million tonne on output which could again reduce surplus expectations from China for this year.

Aluminum Capacity in Shanxi, Hebei, Henan and Shandong (Source: SMM, Reuters, TG estimates)

Region

Capacity Built

(‘000 tons)

Idled

Capacity

(‘000 tons)

Operational

Capacity

(‘000 tons)

Shanxi 1040 45 995

Hebei 80 30 50

Henan 3840 1010 2830

Shandong 10950 270 10680

TransGraph


Stocks in China continues to remain higher to offset lower LME stocks

– With stocks in China seen surging during JFM’17 indicates traders delivering excess stocks which could also offset lower LME stocks weighing on sentiments.

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-Ap

r

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r

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-May

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-May

SHFE Aluminium Stocks ('000 Tons)

Cancelled Warrant On Warrant

0

200

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1000

1200

1400Aluminium inventory in Chinese physical markets ('000 tons)

Shanghai Wuxi Nanhai Others

Source: MySteel, Reuters

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-Ap

r

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-May

LME Aluminium Stocks ('000 tons)Asia USA Europe

TransGraph


Higher China stocks & arbitrage supporting Higher product exports

– With Arbitrage between Chanjiang & LME Spot market remaining negative since past few months along with higher production witnessed in China could lead to steady exports which could weigh on sentiments.

– Also with CNY remaining steady after depreciation seen during OND’16 could remain favourable for exports weighing on sentiments.

2711

24662476

26272680

2800

H1 H2

China Aluminium product exports (KT)

2015 2016 2017

400

300

200

100

0

100

200Aluminium Arbitrage (Changjiang - LME) USD/T

Arbritrage remaining negative since Dec'16 could continue to favour exports

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6.9

7.0

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-May

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-17

USD/CNY

CNY

TransGraph


Japanese Aluminium Demand remains strong

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850 Japan AL imports vs CIF premiums

Imports KT Premiums (usd/t)

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r-1

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Aluminium stocks at Japanese ports (KT)

809 825

1213 1214

825 854

1196 1174

891 910

1170 1170

H1 H2 H1 H2

Transportation Others

Japan Aluminium Demand (KT)

2015 2016 2017

TransGraph


Global automobile sector prospects – Auto demand to remain lower in China on reduced tax incentive partially offset by steady demand from Europe during H2 2017

– Auto sales in China is expected to slowdown during H2 2017 after double digit growth witnessed in same period a year ago on reduced tax incentives from government.

– Decline in China auto demand could be partially offset by steady demand in Europe & U.S during H2 2017.

5%11%

18%

9%3%

19%25%

-2%

49%

10% 6%12%

32%29%

38%

20%18% 14%

-4%

32%

2%

-3%-10%

0%

10%

20%

30%

40%

50%

60%China automobile production growth (YoY %)

Commercial vehicles Passenger vehicles

6584 6284 64818382 7133 6520

2389 2105 2248

23952536

2170

1550 1644 1510

14811505

1695

3083 3156 2973

30183082

3125

0

5000

10000

15000

JFM 2016 AMJ 2016 JAS 2016 OND 2016 JFM 2017 AMJ 2017P

Automobile Production in Major Markets (000 units)

China Japan Germany US

TransGraph


Increasing government curbs to control housing prices growth indicated by declining investments to weigh on sentiments.

– China increased average interest rate for first-

time homebuyers to 4.52% in April in cities

around China, up from 4.49% from a year

earlier and was the fourth consecutive monthly

rate hike since January.

– With China witnessing declining Investment

growth in Fixed Assets into Construction sector

during JFM’17 could continue to weigh on

sentiments for Aluminium.

12.40%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Ap

r-1

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c-1

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Ap

r-1

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Chinese house price Growth rate (YoY %)

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

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08

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r-1

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Accumulated Growth rate in Construction Investment

Growth Rate(YoY%)

TransGraph


Aluminium – Effective Balance Sheet

Description 2015 2016 E 2017 P

Aluminium Production 57.90 58.13 60.38

Aluminium Consumption 56.03 58.49 60.96

P-C Balance 1.87 -0.36 -0.58

Ending Stocks (Producer) 2.37 2.41 2.70

Ending Stocks (Exchange) 3.19 2.65 3.25

No. of Weeks of Consumption

5.26 4.42 4.97

Source: IAI, Reuters, TG Estimates, * All figures are in Million tons unless mentioned otherwise

-0.113

1.873

-0.361 -0.580

5.695.16

4.505.08

2014 2015 2016E 2017P

Global Aluminium P-C balance

Production surplus / deficit (Mln Tons) No. of Weeks of Consumption

15.10 14.41 16.45 15.60 15.60 14.23 16.7513.80

13.11 14.3613.17 14.11 15.10

14.8215.70

15.34

0

5

10

15

20

25

30

35

Prod. Cons. Prod. Cons. Prod. Cons. Prod. Cons.

H1 2016 H2 2016 p H1 2017p H2 2017p

Global Aluminium Supply and demand

China RoW

28.21 28.78 29.62 29.71 30.70 29.0532.45

29.14

All Units in Million Tons

Technical Analysis

18

TransGraph


LME Aluminum SELECT 3 – Month Forward Elliott wave analysis

LME Aluminium 3-Month Forwards prices have culminated primary wave “Y” at USD 1430 and is trading higher as primary wave “A”. Prices after posting Intermediate Wave [Y] at USD 1981 is unfolding lower as a 3-Wave structure and has potential towards USD 1850 to 1800 ahead of turning positive again towards USD 2000 to 2050 in the coming 2 to 3 months.

TransGraph


LME Aluminum SELECT 3 – Month Forward

LME Aluminium prices are holding above trend based support line and hence likely to continue trading upward towards USD 1970 to 2020 by

staying above USD 1850 in the coming 2-3 months ahead of turning negative again.

TransGraph


Price outlook summary

21

Commodity Last Closing

(USD/ton) (as on July 14, 2017)

Price outlook summary for next 2-3 months

Range Direction

LME Aluminium 3-

month forward 1926 1800 – 2050

Aluminium 3 month forward prices are likely to move higher towards USD 2020 ahead of turning lower again towards USD 1850 or lower in the coming 2-3 months.

Note: Weekly close above USD 2020 would negate the subsequent downside potential and current gains can stretch higher towards USD 2120 for the same time period.

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Monthly report format - TransGraph...2016 OND 2016 JFM 2017 AMJ 2017P China Primary Aluminium...

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