SHFE aluminium to extend gains after being lifted by sharp inventory decline and dovish signal of US Fed

Fundamentals: China's aluminium smelter operations stable as of Dec 14. Yunnan capacity unchanged. Inner Mongolia's Baiyinhua ramping up, full operation expected by month-end. SMM reports Huayun's third phase nears completion and operations may start mid-2024. The smelter has 420,000 mt of capacity, but only 170,000 mt will be put into operation due to inadequate capacity quotas. Recent snow in Northwest, North, and Central China disrupts vehicle transport, slows metal delivery, and delays aluminium ingot arrivals. Companies are restocking due to weather concerns, leading to decline in aluminium social stocks. Close watch on aluminium transport is needed. China's downstream demand is stable with minor shifts as of Dec 14. Aluminium plate/sheet/foil market is firm, while extrusion sector dips. Auto and 3C processing firms see order drops, affecting operating rates. However, recent aluminium billet conversion margins have remained at a higher level, prompting some extrusion companies to opt for purchasing aluminium ingots to produce their own aluminium billets. Aluminium wire and cable operating rates remains high, especially in East China's major firms, driven by strong State Grid demand, with no off-season seen yet; Additionally, aluminium rod producers are facing a backlog of orders, which is expected to support the industry's operating rates in the short term.

The Fed held rates at 5.25%-5.50% in December, as expected, lifting market confidence. China's social financing and credit improvements signal support for the real economy. Positive global macroeconomic conditions boost market sentiment. Supply remains stable in China's southwest, but watch for potential aluminium production cuts. On the demand side, the aluminium processing industry has shown a decline in December, but the demand for electricity remains strong, which is unusual for the off-season. Logistics delays and restocking have slashed inventories below 500,000 mt, pressing short sellers out. Near-term prices are likely to be firm and volatile approaching delivery. In the week of Dec 18-22, most-traded SHFE aluminium contract is expected to range between 18,300 and 18,900 yuan/mt; LME prices between $2,130 and $2,230/mt, buoyed by positive macro trends. Monitoring domestic stocks and macro shifts is crucial.