I. Key Points Analysis

1. Alumina production cuts are accelerating, but the industry is still in a state of oversupply.

According to data from Steel Union, the domestic alumina operating capacity has continued to decline since October last year, with operating capacity falling from 98.2 million tons to 92.5 million tons, returning to the levels of March and July last year. Similarly, weekly output data has also declined accordingly, from 1.86 million tons to 1.79 million tons per week. However, the decline in weekly output is less than the decline in operating capacity.

Looking at the ratio of weekly domestic alumina production to weekly domestic electrolytic aluminum production, the ratio has been declining rapidly since mid-to-late January this year, from 2.16 to 2.08. The main reason is the accelerated reduction in alumina production. However, the current ratio still shows an oversupply, with the equilibrium point around 1.98. Considering that domestic electrolytic aluminum production is relatively stable, the path for domestic alumina to reduce excess capacity still lies in its own production reduction efforts.

There are three main reasons for the production cuts: First, losses led to reduced production. According to monthly smelting profit data from SteelHome, the domestic alumina smelting industry saw its profits decline month by month after peaking in August of last year, reaching a loss-making state in January of this year. Henan and Shanxi provinces suffered the most severe losses, thus prompting a proactive desire to reduce production to control losses. Second, seasonal maintenance. Considering the simple alumina smelting process, which allows for quick start-up and shutdown, and the fact that employees are typically on holiday during the Spring Festival, the domestic alumina smelting industry proactively engages in seasonal maintenance and production cuts around the Spring Festival. Third, policy interference. Since last year, news of anti-involution measures in the alumina industry has surfaced twice, in July and December of last year, but corresponding policies were not immediately implemented. It wasn't until early February of this year that a large alumina company in northern China reduced some of its operating capacity due to policy impacts, suggesting that a broader policy for the entire industry may be on the way.

2. Domestic inventory continues to accumulate, but at a slower pace

Looking at domestic alumina inventory, as of February 27th, according to Mysteel statistics, domestic alumina inventory stood at 5.685 million tons, a weekly increase of 31,000 tons. The total inventory increase for February was 120,000 tons, a slower pace than in previous months. However, the trend indicates that the market is still in an accumulation phase, having accumulated for nine consecutive months since May of last year, and current inventory levels are at historically high levels. Breaking it down, port inventory increased by 72,000 tons week-on-week, alumina plant inventory decreased by 60,000 tons week-on-week, electrolytic aluminum inventory decreased by 47,000 tons week-on-week, and platform/transit inventory increased by 66,000 tons week-on-week.

Current data shows that alumina inventory levels at electrolytic aluminum plants are at historically high levels. Since mid-February, there has been a two-week period of destocking, most likely related to the disruption of freight transport during the Spring Festival. Meanwhile, due to smelting process issues, electrolytic aluminum plants maintained normal production during the Spring Festival. Considering the current high profit margins in the electrolytic aluminum smelting industry, we expect aluminum plants to maintain high alumina inventory levels. For alumina plants, current inventory is at a historically high level for this time of year. In the two weeks since the Spring Festival, alumina inventory first increased and then decreased, also due to the impact of Spring Festival freight transport, showing an overall slight destocking. Considering production reductions, the probability of continued destocking in the near future is high.

3. Current seasonal increase in bauxite imports and decrease in price

From the perspective of bauxite supply, import dependence has been increasing year by year, with Guinea occupying a core position among import sources. Regarding prices, imported ore prices have been declining continuously since last year, from a high of $114/dry tonne to the latest $60.5/dry tonne. The rate of decline has slowed recently. Considering the current global geopolitical risks leading to a surge in mineral and trade protectionism, and the interdependent relationship between my country and Guinea regarding alumina supply and demand, we believe that the room for further price declines is limited. However, we need to be wary of policy risks in Guinea's mining sector similar to those seen last May. In terms of supply volume, Guinea's bauxite shipments are currently experiencing a seasonal recovery, with volumes far exceeding historical levels for the same period, indicating a relatively abundant supply.

4. The number of warehouse receipts increased significantly again

Looking at domestic alumina warehouse receipts data for the past month, the number of warehouse receipts has resumed its upward trend since late January, currently reaching 310,700 tons, an increase of nearly 200,000 tons compared to late January. Compared to the increase in warehouse receipts from August to October last year, this recent increase is not solely from Xinjiang; warehouses in Gansu, Shandong, and Guangxi have also seen increases, but the growth rate is lower than last year. The main reason is the high inventory levels accumulated recently. We believe that under the pressure of the current high warehouse receipt levels, futures prices are likely to remain under pressure in the short term.

II. Summary and Outlook

Based on the current situation, the author believes that: Domestic bauxite inventories are high, supply is ample, and this will not affect domestic alumina smelting; although production cuts in the smelting industry have accelerated, overall oversupply remains, and with increased imports of bauxite at lower prices, cost support has weakened; the number of warehouse receipts on the futures market has increased significantly again, putting considerable pressure on short-term prices; at the same time, signs of anti-involution policies are emerging, international geopolitical instability is escalating, and mineral protectionism is on the rise, creating uncertainty in both Guinea and shipping, which will continue to support futures prices.

Based on the market data, the price trend of the main 05 contract is showing a triangular convergence. Pay attention to the strength of the lower support level. It is recommended to wait and see in the short term and wait for the inventory inflection point signal.

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