Since April 2024, driven by favorable factors such as macroeconomic conditions and expectations of a recovery in domestic and international manufacturing sector, the price center of the aluminum market climbed. The most-traded SHFE aluminum contract reached a high of 22,040 yuan/mt on May 30, and spot prices also broke through 21,240 yuan/mt. However, from the performance of the spot market, the domestic spot market continued to show a discount, and as futures prices repeatedly surged, spot discounts continued to expand. Notably, on May 30, the SMM A00 east China spot discount widened to 150 yuan/mt. Reviewing the past ten years of spot aluminum prices, a significant discount in May only occurred in 2015, while in other years, May usually showed a small discount or premium.
From a regional perspective: According to SMM data, the average value of SMM A00 spot discounts in May was approximately 90.5 yuan/mt, a decrease of 25.5 yuan/mt compared to April, making it the region with relatively smaller spot discounts in the three major aluminum ingot spot markets.
In south China, the gradual production resumption by aluminum smelters in Yunnan led to an improvement in aluminum ingot spot supply, causing spot discounts to expand rapidly. The average value of SMM A00 Foshan spot discounts in May was approximately -155.3 yuan/mt, a decrease of 60 yuan/mt MoM, lower than the SMM A00 spot discount average of 64.8 yuan/mt.
In central China, due to a significant increase in aluminum prices in May, downstream purchasing willingness weakened, making it difficult for sellers to offload their stocks, leading to an expansion in the discount range. The average value of SMM A00 (central China) spot discounts in May was approximately -192 yuan/mt, the largest discount among the three major regions.
SMM believes that the reasons for the continued discounts in the spot market are as follows:
1.Aluminum prices remained high, and the spot market was weak in following the rise.
This year, aluminum prices have been driven up multiple times by factors such as disruptions at the mining, consumption expectations rebound, overseas sanctions on Rusal, domestic carbon reduction policies, and interest rate cut expectations. However, from the perspective of supply and demand, the operating capacity of domestic aluminum supply is at a historical high, and it maintains a net import of aluminum ingots. From January to May, the apparent domestic aluminum consumption increased by 9.3% YoY, but the growth rate of consumption was small. Downstream procurement is mainly based on rigid demand, and the purchasing enthusiasm for high aluminum prices is not high, resulting in the spot market being in a discount.
2.The domestic social inventory of aluminum ingots is sufficient, but the destocking process is not smooth.
From March to June each year is usually the destocking period for the social inventory, especially in March and April when the market enters a rapid destocking state. This year, after the Chinese New Year, the domestic social inventory of aluminum ingots reached a peak of 870,000 mt, at a historically high level. However, in Q2 this year, the social inventory of aluminum ingots did not smoothly entered the destocking period, remaining above 750,000 mt for a long run, and the pick-up from warehouses data was also weaker than the same period in previous years. Under the pressure of sellers' need to liquidate, they had to sell at a discount.
3. The processing fees for primary aluminum products such as aluminum billets are low, serving as a substitute for aluminum ingots.
In recent years, due to the rapid increase in aluminum liquid alloying ratio, the market for primary processed products such as domestic aluminum billets, flat ingots, and aluminum rods has been oversupplied. Coupled with the high aluminum prices, the conversion margins for aluminum alloy products significantly decreased. Since the high-cost aluminum ingot remelting production process no longer has an economic advantage, some aluminum deep processing enterprises directly purchased primary processed products with low processing fees to save costs, thereby reducing the demand for aluminum ingots.
Regarding the future trend, SMM believes that the current futures structure maintains a positive structure, and spot prices still have slight discounts to the next month's contract. After the delivery month, spot discounts will continue to be present. From the perspective of supply and demand, although the growth rate of domestic aluminum supply slowed down, the average daily output still reaches 118,000 mt, which is at a historical high. Meanwhile, downstream demand enters the off-season in June, and the supply-demand contradiction in the market may become more prominent, making it less likely for aluminum spot prices to turn into high premiums. In the long run, the discount of aluminum spot prices is unfavorable for arbitrage sellers, inhibiting market transaction activity. It is recommended that all market participants closely monitor changes in spot inventory and futures structure to adjust their strategies in a timely manner.
![Lower Costs Coupled With Weaker-Than-Expected Demand Push Secondary Aluminum Prices Down[SMM Analysis]](https://imgqn.smm.cn/production/admin/votes/imageskkgTu20240508153005.png)
