Since the beginning of 2017, supply-side structural reform has been extended to the electrolytic aluminum industry. While strictly controlling the addition of new production capacity, the industry has also been clearing out illegal capacity and implementing environmentally friendly peak-shaving production measures. The accelerated implementation of these policies has boosted the pace of supply-side structural reform, marking the entry of the electrolytic aluminum industry into a substantive phase of capacity reduction.

　　Benefiting from supply-side structural reform, in the first half of 2017, Shanghai aluminum futures continued the strong performance seen in the second half of 2016. In the second half of the year, as supply-side structural reform deepened, non-compliant production capacity began to shut down—particularly at Weiqiao, which started cutting back on output. As a result, Shanghai aluminum attracted significant capital inflows and rose sharply and rapidly, with the aluminum price center of gravity climbing substantially above 16,000 yuan per ton. Coupled with expectations of environmental production restrictions during the heating season, Shanghai aluminum reached a peak of 17,400 yuan per ton. However, due to weaker-than-expected environmental production restrictions during the heating season—and the resulting suppression of downstream demand—as well as persistently high inventory levels, aluminum prices quickly reversed course, falling to a low of 14,100 yuan per ton and returning to fundamentals.

　　From an international perspective, with major economies yet to show any significant slowdown in growth, the macroeconomic environment in 2018 may turn out better than market expectations, and the bull market for nonferrous metals could continue into 2018. Domestically, since last year, efforts to reduce overcapacity and environmental restrictions on production have had a substantial impact on China’s nonferrous metals market. It is unlikely that policy will shift significantly this year. Meanwhile, the growing middle class in China will boost consumption of high-quality materials, such as nickel, zinc, and copper. Over the next three to five years, nonferrous metals are likely to enter a phase characterized by easy rises but difficult falls.

　　Sun Lei, a senior analyst at Guodian Investment, believes that 2017 was a year in which the aluminum market saw a tug-of-war between policy expectations and actual conditions, with environmental protection-driven production restrictions dominating the entire year. Overall, in 2017, primary aluminum capacity first increased and then declined; aluminum consumption initially strengthened but later weakened. As a result, the market experienced a significant supply surplus throughout the year, and inventory levels remained high. Regarding aluminum demand in 2018, she anticipates that, given weaker investment prospects in sectors such as power grids, the growth rate of aluminum demand may slow down on a sustained basis. However, next year’s downstream operating rates could be better than this year’s, and emerging consumption areas deserve close attention. On the supply side, the expected increase in new aluminum supply in 2018 is likely to slow down. Given the low likelihood of a clear policy shift, resuming production in 2018 will remain challenging. She forecasts that the domestic aluminum market in 2018 will generally achieve supply-demand balance, with an annual supply deficit of 200,000 tons—particularly in the second quarter when supply is expected to be relatively tight. Primary aluminum prices will mainly fluctuate within a cost-based range. The price range likely to dominate the year could be between 13,800 yuan/ton and 16,200 yuan/ton, with an upward price trend being more probable.

　　Regarding this year’s nickel market situation, Fan Runze, Chief Analyst at Antaike Nickel, stated that on the supply side, global nickel ore production grew by 6.9% in the first three quarters of 2017. China’s primary nickel production remained stable with a slight increase; China’s primary nickel output for 2017 is expected to reach 630,000 tons. Before 2020, China’s primary nickel production is forecast to show a relatively stable trend with modest growth. On the consumption side, global nickel consumption rose by 5.9% year-on-year last year, with the majority of the increase concentrated in Asia. In the stainless steel sector—the main consumer—China’s stainless steel production continued to grow last year, and strong export performance helped reduce inventory levels. As of early December last year, social stainless steel inventories had fallen back to normal levels. In the battery sector, nickel consumption holds the greatest potential; in 2017, nickel consumption totaled 49,000 tons, with primary nickel accounting for 80%. By 2020, China’s nickel consumption in the ternary material industry is expected to rise to 135,000 tons. Looking ahead at the global nickel supply-and-demand dynamics, Fan Runze noted that as Indonesia’s NPI production ramps up and China’s NPI output recovers, future demand from the stainless steel industry should be adequately met. However, nickel sulfate will likely erode some of the market share previously held by pure nickel. He forecasts that in 2018, nickel prices will range between US$11,000 and US$13,500 per ton. Against the backdrop of a significantly slowing growth rate in stainless steel consumption, if nickel demand for electric vehicle batteries rises—as market expectations suggest—to 400,000 tons per year around 2020–2025, nickel prices could experience a breakthrough increase.

　　According to a report by the China Securities Journal, several analysts interviewed expressed relatively consistent optimism about the expected rise in nickel prices in 2018. The nonferrous metals team at Xinda Futures stated that, in 2018 investment strategies for the nonferrous metals sector, they tend to favor buying call options on nickel. Ji Changqing, a researcher at Zhongcai Futures, also believes that nickel prices in 2018 will move forward amid fluctuations. Rising demand will drive up the prices of both nickel sulfate and pure nickel, while the price of ferronickel may decline due to a slowdown in demand growth—primarily stemming from a downturn in the real estate sector. It is expected that nickel prices are likely to weaken in the first quarter of 2018; however, once construction activity picks up again in the second quarter and various policies take effect (such as subsidies for new energy vehicles), nickel prices will experience a significant bull run.

　　It’s worth noting that, as consumption upgrades take hold, the development of the new-energy vehicle industry will inevitably boost expectations for demand for nonferrous metals. “Judging from the development trends in the new-energy vehicle industry, a rough estimate suggests that copper consumption could increase by 90,000 to 100,000 tons. Moreover, although meeting the demand for longer driving ranges in new-energy vehicles requires balancing the economic trade-offs between increasing battery capacity and enhancing energy density, a positive aspect is that, given the high cost of cobalt in ternary lithium batteries, future battery improvements will likely shift focus toward increasing the proportion of nickel—from 20% to 80%. The resulting boost in nickel consumption cannot be overlooked,” said the nonferrous metals team at Nanhua Futures.

　　According to a report by Futures Daily, supply-side factors have been influencing the economy over the past period. However, in the view of Wu Ge, Chief Economist and Assistant General Manager at Huarong Securities, these supply-side changes do not necessarily indicate that future economic momentum will pick up, as sustained expansion in demand also plays a crucial role in improving supply conditions. He expects that, with the end of the heating season, supply-side disruptions will ease somewhat in 2018.

　　Xu Xiaoqing, Director of Macro Strategy at Dunhe Asset Management, believes that as technology advances and capital efficiency improves, the supply side is having an increasingly smaller impact on commodity prices. The core issue still driving price movements remains demand. He pointed out that over the past two years, China has focused its attention on the supply side—a trend evident in the fact that, in 2017, output growth for nearly all major industrial products fell below the levels seen in 2016. “After the supply side contracted in 2017, the price increases for industrial products also lagged behind those of 2016,” Xu Xiaoqing said. “This indicates that the contraction on the supply side did not drive up prices; rather, it has fueled market concerns about the demand side.”

　　Xu Xiaoqing believes that even against the backdrop of supply-side structural reform, the pace of commodity price increases still cannot escape the framework of demand. In terms of directional fluctuations, industrial prices have never been decoupled from demand.

　　Specifically regarding demand for non-ferrous metals, Dong Hao, fund manager at Kaifeng Investment Management Co., Ltd., noted that 2016 was the year with the largest increase in China’s middle-class population. The continued rise of the domestic middle class will provide both purchasing power and tax revenue support for non-ferrous metal consumption. Moreover, the growth of the middle class is also boosting consumption of high-quality materials, such as nickel, zinc, and copper, in their respective markets.

　　Dong Hao believes that the nonferrous metals market in 2017 continued the bull market trend from 2016. The foundation of this bull market stems from the robust performance of major economies, which has set the global economy on a positive cycle and thereby boosted demand. As the growth rates of major economies have yet to slow down significantly, the macroeconomic environment in 2018 may turn out better than market expectations, and the bull market for nonferrous metals could persist into 2018. Looking at the relative strength of different nonferrous metal varieties, he anticipates a pattern of “zinc > copper > nickel > aluminum.”

　　The nonferrous metals team at Nanhua Futures stated that, with the implementation of supply-side structural reform, fixed-asset investment in the nonferrous metals industry has seen an absolute decline. In fact, the growth rate of fixed-asset completion in the nonferrous metals sector has been steadily declining from its peak in 2004 on a year-on-year basis. Since October 2015, fixed-asset investment in the nonferrous metals industry has entered a phase of absolute negative growth. As of November 2017, the year-on-year growth rates for nonferrous metal mining and beneficiation as well as smelting had fallen to -21.3% and -4.6%, respectively. With the absolute reduction in capital investment, industrial balance will accelerate, and price levels will shift upward toward more reasonable ranges. From an industry perspective, over the next three to five years, nonferrous metals are likely to enter a pattern characterized by easy rises but difficult falls.