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With the ongoing decline in coal and crude oil prices, the cost of raw materials for electrolytic aluminum is gradually decreasing. As a result, the aluminum smelting industry is expected to face a wave of destocking in the second quarter. Despite the reluctance of many companies to cut production, prolonged losses have made it increasingly difficult for them to sustain operations. The process of aluminum prices reaching their bottom is likely to be long and challenging.
According to recent reports, some domestic aluminum smelters began experiencing losses at the end of the fourth quarter of 2011. After nearly 18 months of financial pressure, aluminum prices continued to fall, pushing more smelters into the red. Currently, several companies are suffering from extended cash flow deficits, with losses growing as prices keep dropping. We estimate that since March, the forward price of Shanghai Aluminum has fallen to around 14,250 yuan. Due to these low prices, many grid-powered smelters in Henan, Shanxi, Guangxi, and Yunnan are facing cash flow losses of over 500 to 1,000 yuan per ton.
In response to this situation, the Nonferrous Metals Industry Association has held multiple meetings with major domestic aluminum producers to discuss the issue of overcapacity and the potential for production cuts. However, due to varying operating costs among different companies, no consensus was reached on specific production reduction measures. Although large-scale aluminum companies have not yet agreed on cutting output, this development highlights the growing pressure within the industry. Production cuts are becoming an unavoidable option for many firms.
We maintain our previous view that a significant reduction in domestic aluminum smelting capacity during the end of the second quarter or early third quarter is highly likely. Based on this expectation, we believe that the decline in Shanghai Aluminum prices in May may be limited. However, if the production cuts do not reach a meaningful scale, the downward trend in aluminum prices is expected to continue. The industry is at a critical juncture, and the coming months will determine whether a real turnaround can be achieved.