Risk of Supply-Side Disruptions in the Middle East, Continued Divergence in the Price Spread Between Domestic and Overseas Markets and Inventory Structure [SMM Aluminum Weekly Review]

SMM, April 2:

The aluminum market is currently driven by multiple factors, including macro liquidity, geopolitical risks, and fundamental supply disruptions, while the price spread between domestic and overseas markets and inventory structure continue to diverge.

Macro perspective:

China: The central bank's Monetary Policy Committee explicitly stated that it will continue to implement a moderately accommodative monetary policy. The liquidity environment remains supportive, providing bullish support for aluminum prices.

Outside China: Uncertainty surrounding geopolitical conflicts in the Middle East remained high. Trump said Iran had sought a ceasefire through a third party, which Iran firmly denied; meanwhile, Trump also stated that he was considering withdrawing from NATO, further raising global geopolitical uncertainty.

Fundamentals:

Supply side, the Middle East conflict disrupted core capacity, while the proportion of liquid aluminum in China rebounded sharply. Supply outside China was directly hit by geopolitical conflict, with Middle Eastern aluminum enterprises cutting production. Recently, UAE's EGA and Bahrain's Alba were hit by missile attacks in succession, damaging production facilities. The extent of the damage is still under full assessment, and the market generally expects large-scale production cuts or even shutdowns, widening the expected global aluminum supply gap and intensifying concerns over overseas supply. In China, the proportion of liquid aluminum rebounded in March as downstream operations fully resumed after the holiday, rising sharply by 9.3 percentage points MoM to 73.7%, above expectations at the beginning of the month. Entering April, the traditional peak consumption season, downstream operating rates are expected to continue rising, and the proportion of liquid aluminum is likely to climb further. On the inventory side, high aluminum prices in China suppressed downstream willingness to actively restock. Downstream enterprises generally purchased as needed based on orders and maintained low inventory operations, with no large-scale stockpiling for now. As of Thursday this week, China's social inventory of aluminum ingot increased slightly by 14,000 mt from last Thursday, and short-term inventory remained at a relatively ample level. The key focus now is whether the April peak season can drive inventory smoothly into a destocking cycle under the backdrop of high aluminum prices. Inventories outside China continued to decline, with LME aluminum inventory maintaining a downward trend this week and falling to 414,000 mt.

Overall:

The core focus for the later market is whether core aluminum plants in the Middle East will further expand production cuts. If the cuts continue to materialize, they will provide strong upward momentum for global aluminum prices. At present, domestic inventory is sufficient in the short term, while with the two major core Middle Eastern capacities of EGA and Alba under disruption, the overseas supply gap continues to widen, and LME aluminum has outperformed SHFE aluminum. This week, the SHFE/LME price ratio continued to fall back to 7.01. As the overseas supply gap becomes more evident further out, the SHFE/LME price ratio is expected to have further downside room, and long domestic/short overseas arbitrage is expected to continue increasing.

Aluminum prices are expected to continue to fluctuate at highs next week, with the most-traded SHFE aluminum contract expected to trade at 24,500-25,500 yuan/mt and LME aluminum at $3,450-3,550/mt.