Geopolitical Conflicts Coupled with Inventory Destocking Drive SHFE and LME Aluminum to Drift Higher Short-Term [SMM Aluminum Morning Briefing]

7.1 SMM Morning Meeting Minutes

Futures: The most-traded SHFE aluminum contract opened at 23,130 yuan/mt in the night session on July 9, with a high of 23,220 yuan/mt, a low of 22,985 yuan/mt, and closed at 23,105 yuan/mt, up 0.20% from the previous close. During this period, prices continued their rebound from lows, holding above MA5 (23,058.49), MA10 (22,980.96) and MA20 (22,987.34), but still under pressure below the medium and long-term MAs MA40 (23,248.75) and MA60 (23,494.26). The bearish alignment of medium and long-term MAs remained unchanged, while support at the previous low of 22,250 held firm. Trading volume during this period was 75,000 lots, and open interest was 231,000 lots, up 3,146 lots from the previous session. The futures shifted to bullish position-building, with a rising willingness of buying funds to enter the market. From a technical perspective, on the 4-hour chart, the MACD DIFF (-108.88) stayed above DEA (-206.49), maintaining a golden cross pattern. The red histogram stick value was 195.23, and bullish momentum kept expanding. On July 9, LME aluminum opened at $3,144.5/mt, with a high of $3,213.5/mt, a low of $3,123.5/mt, and closed at $3,210.5/mt, up 2.29% from the previous close. Today's price launched a strong rebound from the previous low of 3,040, closing as a bullish candlestick, and broke above the short-term MAs MA5 (3,160.18) and MA10 (3,157.92). However, it remained below the medium and long-term MAs MA20 (3,230.44), MA40 (3,336.12) and MA60 (3,369.37). The bearish downward alignment of medium and long-term MAs has yet to reverse. Support at the previous low remained solid, and the downtrend has paused for now. The day's trading volume was 24,878 lots, higher than the previous session, while open interest was 601,000 lots, down 1,200 lots from the previous session, indicating a pattern of bears reducing positions and exiting. From a technical perspective, on the daily chart, the MACD DIFF (-102.06) crossed above DEA (-109.89), forming a golden cross. The histogram flipped from green to red, bearish momentum subsided, and bullish momentum officially commenced, establishing a short-term rebound trend.

Macro front: The ECB's June meeting minutes showed that the bank can no longer ignore the energy shock, as rising energy prices are expected to push medium-term inflation above its 2% target. Last month, the ECB Governing Council unanimously decided to raise the key interest rate to 2.25%, making it the first major central bank to hike rates due to high energy prices caused by the Iran war. Fed Chairman Walsh Kevin has formed five working groups to conduct a comprehensive review of the Fed's monetary policy operating framework, covering areas such as balance sheet management, policy tools, and the impact of artificial intelligence. The Fed stated that the working groups will operate independently, conduct fact-based research, and present rigorous analysis to the Federal Open Market Committee. According to CME "FedWatch": The probability of the US Fed keeping interest rates unchanged in July was 74.9%, while the probability of a cumulative 25bp rate hike stood at 25.1%. For September, the probability of unchanged rates was 35.7%, a cumulative 25bp hike stood at 51.1%, and a cumulative 50bp hike was 13.1%.

Fundamentals: In terms of aluminum price spreads, the SHFE/LME price ratio continued to repair. On Thursday, the SHFE/LME aluminum price ratio rebounded to 7.36, up significantly from 7.28 in the previous week. Boosted by aluminum billet processing fees, domestic enterprises showed stronger production willingness, the proportion of liquid aluminum climbed steadily, and market casting ingot volume contracted. Meanwhile, downstream substitution demand was released, with alloy plants and extrusion plants switching to aluminum ingots to replace aluminum scrap and billets, driving persistent high rigid demand for aluminum ingots, and the subsequent inventory destocking pace is likely to continue. This week, the overall operating rate of industry-leading domestic aluminum processing enterprises remained in a downtrend, edging down 0.7 percentage points WoW to 61.9%, as the off-season effect exerted notable constraints.

Primary aluminum market: During the morning session, the trading center of the SHFE aluminum 2606 contract was lower than the same period of the previous trading day. Weighed by lower aluminum prices, selling sentiment in the market edged down WoW from the previous day, with some sellers holding prices firm and holding back from selling. Overall stockpiling sentiment among downstream buyers stayed high, and their price acceptance improved WoW from the previous day. Market transactions were concluded at parity to a premium of 20 yuan/mt against the SHFE aluminum 07 contract, with mainstream deals at a premium of 10 yuan/mt. In east China, the selling sentiment index closed at 2.98, down 0.09 WoW; the buying sentiment index stood at 3.04, up 0.04 WoW. During the morning session, aluminum futures underwent a slight correction. In central China, downstream processing enterprises were constrained by weak end-user orders and high finished product inventories, leaving buying sentiment subdued. However, as the discount widening trend continued, trading firms engaging in both spot and futures market maintained high buying sentiment, preferring to purchase at deep discounts, while suppliers demonstrated notable willingness to hold prices firm. Consequently, the actual transaction price range in central China settled around a discount of 120-140 yuan/mt against the SHFE aluminum 07 contract. The selling sentiment index in central China stood at 2.86, down 0.01 WoW; the buying sentiment index came in at 2.15, up 0.02 WoW.

Aluminum scrap: Yesterday, SMM A00 spot aluminum prices closed at 22,950 yuan/mt, a slight correction of 90 yuan/mt WoW from the previous trading day. The overall aluminum scrap market tracked the decline, with some regions adopting a wait-and-see stance and holding steady. On the price difference between A00 aluminum and aluminum scrap, the spread between A00 aluminum and mixed aluminum extrusion scrap free of paint in Foshan stood at 2,011 yuan/mt on July 9, while the spread between A00 aluminum and shredded aluminum tense scrap was 697 yuan/mt, slightly stabilizing from historically extreme lows of the previous week, though still at very low levels. As the stricter reverse-invoicing policy provides a floor, the logic that aluminum scrap is more likely to rise than fall remains intact. Supply-side constraints continue to intensify, and the impact of the reverse invoicing policy is deepening further. News emerged from Shandong that reverse invoicing will be suspended from July, while production cuts and shutdowns among small and medium-sized scrap utilization enterprises in Anhui, Jiangxi, Hubei and other regions have been spreading. The scarcity of compliant, invoiced aluminum scrap has risen further. Moreover, on the import side, the earlier inversion in the price spread between Chinese and overseas markets caused a shortage of high-quality overseas cargoes. Due to a 1-3 month shipping lag, port arrivals from June to August remain low. Meanwhile, the UAE's implementation of an aluminum scrap export ban and the EU's tariff hike policy have further intensified the contraction in overseas aluminum scrap supply. Next week, the aluminum scrap market is expected to continue its narrow-range consolidation pattern characterized by demand suppression and cost support, with the mainstream trading range for shredded aluminum tense scrap (priced based on aluminum content) centering around 19,900-20,500 yuan/mt. The pullback in spot primary aluminum prices means limited room for the price difference between A00 aluminum and aluminum scrap to narrow further. The cost advantage of aluminum scrap over primary aluminum is unlikely to disappear in the short term, and demand-side support for aluminum scrap prices persists. If aluminum prices continue to decline thereafter, the substitution effect of primary aluminum for aluminum scrap will accelerate and become more apparent.

Secondary aluminum alloy: Spot market: Yesterday, ADC12 market offers were generally stable, with slight declines in some areas, and wait-and-see sentiment in the market intensified further. Yesterday, aluminum prices and cast aluminum alloy pulled back slightly. Some enterprises did not rush to follow the decline, instead waiting for greater market clarity, and indicated that if the futures market continues to weaken, there is a possibility of catch-up declines later. Meanwhile, since July, downstream orders have weakened somewhat, and transaction support has been insufficient, exerting some pressure on prices. In addition, recently imports of ADC12 supply have increased, easing earlier expectations of tight domestic supply, which also weakened the market's confidence in holding prices firm. However, against a backdrop where aluminum scrap costs still exhibit some resilience, most enterprises are currently mainly adopting a wait-and-see stance and holding prices steady, and ADC12 prices are expected to continue moving sideways in the short term.

Aluminum market summary: On the macro front, the US-Iran situation has escalated rapidly. The US re-imposed comprehensive oil sanctions on Iran, terminated relevant memorandums of understanding, and launched strikes on over a hundred Iranian military facilities; Iran retaliated immediately, causing a rapid rise in Middle East geopolitical risk premiums. On the domestic front, positive factors are prominent. The proportion of liquid aluminum continues to rise, and aluminum ingot warehouse withdrawals have hit a four-year high in the past week, with the destocking pace accelerating markedly and providing support for SHFE aluminum at the bottom. Amid the interplay of bullish and bearish factors, the bearish impact of a stronger US dollar and the bullish effect of higher geopolitical risk premiums offset each other. After its earlier oversold decline, LME aluminum's downward momentum has slowed, and in the short term it will mainly consolidate and recover at lows. Supported by rapid destocking, the domestic market is unlikely to underperform LME aluminum, and the SHFE and LME may see slight divergence, making a sustained one-sided weak trend difficult. Overall, Middle East geopolitical conflicts are pushing up risk premiums, and continued destocking of aluminum ingots in China is supporting aluminum prices to hold up well. However, the continued release of aluminum capacity outside China and the US's strong dollar policy will continue to suppress the upside room for aluminum prices, creating significant pressure on the upside.

[The information provided is for reference only. This article does not constitute direct investment advice. Clients should make decisions prudently and not solely rely on this as a substitute for independent judgment. Any decisions made by clients are unrelated to SMM.]