US Fed Hawkish Pivot, Macro Headwinds Weigh on Nonferrous Metals Prices [SMM Aluminum Weekly Review]

SMM, June 25 –

Macro perspective: The US Fed pivoted hawkish, and macro headwinds weighed on non-ferrous metal prices.

The Fed left interest rates unchanged in June, but the dot plot turned hawkish. CME data showed the probability of a September rate hike at 66.7%, rising to 75.6% for October, while the probability of the Fed holding rates through December stood at just 13.8%, with the hike probability climbing to 86.2%. This sent the US dollar index above 101, putting broad-based pressure on non-ferrous metals. In the Middle East, the US and Iran signed a preliminary deal early in the week, creating room for an extended ceasefire, the resumption of shipping through the Strait of Hormuz, and further talks. However, an Iranian source indicated that the strait would not be reopened unless the Lebanon ceasefire was respected and exemptions for Iranian oil sales were granted. As of June 25, the Middle East situation remained volatile, and the geopolitical risk premium had yet to fully fade.

Fundamentals: SHFE/LME price ratio recovered, and aluminum semis exports were at risk of decline.

Supply side, according to SMM data, China’s aluminum production rose MoM this week, driven by the ramp-up of new capacity and the resumption of idle capacity. The proportion of liquid aluminum increased by 0.2 percentage points MoM, and casting ingot volumes fell further. Outside China, high prices earlier spurred faster commissioning of new projects. As these projects start up and ramp up, operating aluminum capacity outside China is expected to edge higher MoM. Inventory side, aluminum inventory continued to destock smoothly this week. As of Thursday, domestic aluminum ingot social inventory fell 50,000 mt WoW and 37,000 mt from Monday. Weakening aluminum prices lifted downstream buying sentiment, fueling the destocking. Export side, the SHFE/LME price ratio quickly recovered to 7.29 as of June 25, up 12.2% from the earlier low of 6.5. The import loss narrowed to around 3,400 yuan/mt, down nearly 45% from the previous maximum loss of 7,604 yuan/mt. As a result, the profit margin that had driven heavy aluminum semis exports narrowed sharply. New orders in some segments have already declined. With orders on hand gradually being fulfilled, if export margins cannot recover going forward, aluminum semis exports are at risk of decline.

Overall, the Fed’s hawkish pivot boosted the US dollar index, weighing on non-ferrous metal prices. The Middle East situation remained somewhat volatile but showed no signs of deterioration. Under macro headwinds, aluminum prices fell both in and outside China. In the short term, bearish factors dominate, and aluminum prices are expected to remain in the doldrums. The most-traded SHFE aluminum contract is expected to trade in a range of 22,000-23,200 yuan/mt next week, and LME aluminum between $3,000-3,250/mt. Continuous attention should be paid to the production resumption news in the Middle East, ex-China aluminum ingot inventory trends, and macro news fluctuations.

[The information provided is for reference only. This article does not constitute direct advice for investment research decisions. Clients should make decisions prudently and should not use this as a substitute for their own independent judgment. Any decision made by the client is not related to SMM.]