Middle East Conflict Pushes Up Risk Premium, Aluminum Ingot Destocking Supports Aluminum Price [SMM Weekly Aluminum Price Review]

SMM, July 9:

1. Macro perspective

The US-Iran situation escalated rapidly, as the US reinstated comprehensive oil sanctions on Iran, terminated the relevant memorandum of understanding, and launched strikes on over a hundred Iranian military facilities. Iran immediately retaliated, causing a sharp rise in geopolitical risk premiums in the Middle East.

2. Fundamentals

Markets outside China, the resumption of aluminum production and the release of new capacity continued overseas, gradually materializing global supply growth. Long-term expectations of a shift from tight to loose in the global aluminum market kept building, significantly suppressing the upside room for spot aluminum premiums abroad and exerting medium and long-term pressure on LME aluminum prices. Meanwhile, expectations of a persistently strong US dollar further constrained the upside for aluminum prices.

Domestic market, inventory side, China's aluminum ingot inventory continued destocking. According to SMM data, as of July 9, social inventory of aluminum ingots in China stood at 1.078 million mt, down by 52,000 mt WoW, maintaining a pullback trend and providing support for aluminum prices. Spread side, the SHFE/LME aluminum price ratio continued to recover, with the ratio rebounding to 7.36 this Thursday, up from 7.28 WoW. Boosted by rising aluminum billet processing fees, the production enthusiasm of Chinese enterprises improved, the proportion of liquid aluminum climbed steadily, and casting ingot volumes contracted. Meanwhile, downstream substitution demand emerged, with alloy plants and extrusion plants switching to aluminum ingots to replace aluminum scrap and aluminum billet, driving rigid demand for aluminum ingots higher and suggesting the destocking pace may continue.

3. Overall assessment

Overall, Middle East geopolitical conflicts pushing up risk premiums, along with continued destocking of China's aluminum ingot, supported aluminum prices to hold up well. However, the ongoing release of aluminum capacity overseas and the US policy of a strong dollar will continue to suppress the upside room for prices, presenting clear resistance overhead. Our comprehensive forecast is that short-term aluminum prices will consolidate on a strong note but encounter resistance. Next week, the most-traded SHFE aluminum contract is expected to trade in the range of 22,400-23,400 yuan/mt, while LME aluminum is expected to trade in the range of $3,000-3,200/mt.

[The information provided is for reference only. This article does not constitute a direct recommendation for investment and research decisions. Clients should make cautious decisions and should not use this as a substitute for their own independent judgment. Any decisions made by clients are not the responsibility of SMM.]