China's aluminium market has shown resilience this year, with prices on the Shanghai Futures Exchange (SHFE) climbing over 1%, contrasting global trends that saw an over 8% slump on the London Metal Exchange (LME). The strength of China's green sector amidst a slow economic recovery is largely credited for this divergence.
An open arbitrage window, created by SHFE outperforming LME, has significantly increased aluminium imports into China. Russia has emerged as a primary source of these imports, due to self-sanctioning by Western buyers following Russia's invasion of Ukraine. As a result, China accounted for 87% of its total aluminium imports from Russia during the first eight months of 2023.
Despite the surge in imports, domestic aluminium production in China has also reached new highs. This increase is primarily attributed to an improved hydropower supply in Yunnan province. However, potential disruptions from the forthcoming dry season could lead to a decrease in output and a surge in imports.
Low domestic aluminium inventories have further underscored the robust domestic demand for the metal, with SHFE stocks falling to their lowest since March 2019.
Beijing's decarbonisation efforts have significantly driven aluminium demand, especially in renewable energy-related manufacturing. This trend is evident in the rapid growth of China's new energy vehicles (NEV) sector, which experienced a year-on-year increase of over 37% in the first eight months of this year. Aluminium's critical role in battery electric vehicles further emphasizes its importance in this sector.
The solar industry, another major consumer of aluminium, continues to grow despite challenges from the pressured construction sector. With China leading in solar photovoltaic (PV) capacity additions, the continued expansion of green sectors is expected to counterbalance traditional sector weaknesses and enhance demand for green metals like aluminium.
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