Macro sentiment hedge weighs on the rise; China destocking accelerates, supporting the aluminum price bottom [SMM Aluminum Morning Brief]

7.9 SMM Morning Briefing

Futures:On the night session of July 8, the most-traded SHFE aluminum contract opened at 23,075 yuan/mt, reached a high of 23,080 yuan/mt and a low of 22,965 yuan/mt, and finally closed at 23,020 yuan/mt, down 0.24% from the previous close. During this period, after an early rebound, prices pulled back slightly, closing as a small bearish candlestick. Prices remained above the MA5 (23,005.80) and MA20 (22,964.75) moving averages, but were under pressure below the medium- and long-term moving averages of MA40 (23,266.60) and MA60 (23,522.23). The previous low of 22,250 served as effective support. Overall, the market remained in a stage of rebounding from lows and repairing. Trading volume during this period was 58,900 lots, a significant decrease from the previous period, while open interest was 229,000 lots, down 3,322 lots. The futures showed signs of long position liquidation. From a technical perspective, on the 4-hour MACD, the DIFF (-155.84) was above the DEA (-255.53), maintaining a golden cross pattern, with the red histogram reading 199.37, indicating that bullish momentum was still expanding. On July 8, LME aluminum opened at $3,140.0/mt, with a high of $3,165.0/mt and a low of $3,125.5/mt, before closing at $3,138.5/mt, a slight decline of 0.02% from the previous close. During the session, prices extended their consolidation at lows, briefly rising before pulling back to close as a doji star. Prices held above the MA5 (3,126.63) but faced resistance at the MA10 (3,144.78). Overall, they remained below the medium- and long-term moving averages of MA20 (3,232.66), MA40 (3,342.73), and MA60 (3,374.82). Moving averages across all timeframes maintained a bearish downward alignment. The previous low of 3,040.0 provided solid support. Trading volume for the day was 21,417 lots, a slight increase from the prior session, while open interest was 602,400 lots, up 2,151 lots. The futures exhibited slight signs of short position building. On the daily MACD, the DIFF (-113.71) was below the DEA (-111.85), keeping the death cross pattern intact. The green histogram reading was only -3.73, indicating that bearish momentum was nearing exhaustion, and prices were expected to primarily consolidate at lows in the short term.

Macro front:At its June meeting, the US Fed kept the benchmark interest rate unchanged in the 3.50%-3.75% range, but the latest projections indicated that the market generally expects a potential rate hike this year, with 9 of the 18 policymakers anticipating a slight increase by the end of 2026. According to CME "FedWatch": the probability of the Fed keeping rates unchanged in July is 69.0%, and a cumulative 25bp hike is 31.0%. For September, the probability of rates staying unchanged is 31.1%, a cumulative 25bp hike is 51.9%, and a cumulative 50bp hike is 17.0%.

Fundamentals:The aluminum scrap market is expected to continue its subdued consolidation pattern in H2, but with notable bottom support. The price difference between A00 aluminum and aluminum scrap has narrowed to a historical low. The constraints of the reverse invoicing policy continue to build a floor for aluminum scrap prices. If primary aluminum prices stabilize and rebound, there is limited room for the spread to recover; if primary aluminum continues to decline, the substitution effect of aluminum scrap will accelerate, putting further pressure on the spread, and an extreme scenario where scrap prices invert against primary aluminum could even occur. In the near term, the reverse invoicing policy is unlikely to materially ease, and the tight supply of compliant tax-invoiced cargo will persist. Focus should be on the enforcement standards in newly added provinces such as Shandong, changes in local tax inspection intensity, and whether policy details will see a window for optimization and adjustment. On the inventory side, as of this Thursday, aluminum ingot inventory at major domestic consumption areas stood at 1.078 million mt, down 20,000 mt from Monday and down 52,000 mt from last Thursday.

Primary Aluminum Market:In early trading, the SHFE aluminum 2606 contract's trading center was higher than the level at the same time the previous trading day. Yesterday, selling sentiment in the market strengthened compared to the previous day. Some downstream players turned bullish on near-term aluminum prices, and buying sentiment picked up. Downstream price acceptance improved from yesterday. Mainstream transactions were concluded at parity to a premium of 10 yuan/mt against the SHFE aluminum 2607 contract. In east China yesterday, the selling sentiment index was 3.07, up 0.06; the buying sentiment index was 3.00, up 0.20. While SHFE aluminum futures continued to rebound, bearish sentiment remained strong among downstream processing enterprises and trading firms engaging in both spot and futures markets in central China. Such trading firms tended to widen the discount to purchase large volumes to profit from the price spread, while downstream factories, constrained by end-user orders and finished product inventories, saw persistently low purchase willingness. Ultimately, the actual transaction prices in central China settled around a discount of 110-140 yuan/mt against the SHFE aluminum 2607 contract. In central China yesterday, the selling sentiment index was 2.87, down 0.02; the buying sentiment index was 2.14, up 0.04.

Aluminum Scrap:Yesterday, SMM A00 spot aluminum closed at 23,040 yuan/mt, up 100 yuan/mt from the previous trading day, and the aluminum scrap market generally followed the uptick. Regarding the price difference, on July 8, the price difference between A00 aluminum and mixed aluminum extrusion scrap free of paint in Foshan stood at 2,046 yuan/mt, while that for shredded aluminum tense scrap was 732 yuan/mt. Notably, under the dual impact of rapidly declining aluminum prices and tight invoice supply, the price spread for the aluminum tense scrap series narrowed sharply. Some cast aluminum alloy enterprises have begun to use A00 aluminum ingots instead of scrap as raw material for production. It is expected that the aluminum scrap market will continue to consolidate on a subdued note, but downside room is limited. The mainstream range for shredded aluminum tense scrap priced based on aluminum content is expected at 19,200-19,800 yuan/mt (excluding tax). On the supply side, the constraint from the reverse invoicing policy is unlikely to reverse in the near term, and the tight supply of compliant tax-invoiced cargo persists. On the import side, the combined headwinds and the lagged suppression effect on actual port arrivals will gradually emerge over the coming months, and imported aluminum scrap supplementation will further weaken. Demand side, as the off-season deepens downstream operating rates remain low, with little substantive improvement in end-user orders. Scrap utilization enterprises will most likely continue purchasing as needed and maintain low inventory strategies. The price spread between primary aluminum and aluminum scrap has narrowed to a historical low, significantly eroding the economic advantage of aluminum scrap over primary aluminum. If aluminum prices continue to decline, the substitution effect will accelerate noticeably.

Secondary Aluminum Alloy: Spot market: Yesterday, quotes in China’s secondary aluminum alloy market mostly consolidated on a strong note, with the SMM ADC12 price rising by 50 yuan/mt MoM to 24,100 yuan/mt. Quotes diverged somewhat yesterday—boosted by the sustained rebound in aluminum prices and futures, some enterprises actively followed with price hikes, while others chose to hold off and watch for now due to lackluster downstream demand, slowing procurement pace among end-users, substantial shipment resistance, and limited motivation to adjust prices. Market sentiment turned cautious. Overall, the ADC12 market yesterday saw both price-following hikes and wait-and-see approaches coexisting; the price uptrend lacked effective support from demand, and the market is expected to continue consolidating in the short term.

Aluminum Market Summary: On the macro front, weak US nonfarm payrolls for June pushed back expectations for US Fed interest rate hikes, and a weaker US dollar provided valuation support for nonferrous metals. However, hawkish statements from officials reaffirming high rates and balance sheet reduction limited the dollar's downside room. The US-Iran resumption of nuclear consultations continued to compress the geopolitical risk premium, to some extent capping the upside room for commodities. Meanwhile, expectations for new aluminum capacity coming online outside China added a bearish medium and long-term supply factor. Domestically, positives stood out—the share of liquid aluminum continued to rise, aluminum ingot warehouse withdrawals over the past week hit a four-year high, and the pace of destocking has noticeably accelerated, underpinning SHFE aluminum. Amid the interplay of bullish and bearish factors, dollar strength and supply/geopolitical headwinds outside China offset each other. After earlier overshooting, the downward momentum in LME aluminum slowed, with short-term movements centered on consolidating and repairing at lows. Supported by rapid destocking in China, the likelihood of domestic prices underperforming LME aluminum is low. SHFE and LME may show a slight divergence, while persistent one-sided weakness will be difficult to sustain.

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