Export Demand Offsets Weak Domestic Consumption, China Aluminum Prices Expected to Fluctuate in the Short Term [SMM Aluminum Price Weekly Review]

SMM June 4 update:

Macro perspective: Middle East situation remains volatile, intense tug-of-war between longs and shorts on macro front

The Middle East situation continued to show volatility this week, with geopolitical conflict risks undiminished. On May 29, the US and Iran still had disagreements over a ceasefire agreement, with both sides claiming to have struck the other; on June 1, Iran said it would completely blockade the Strait of Hormuz; on June 2, Iranian media reported that transit permits for the Strait of Hormuz were open for application; on June 3, Trump claimed he was working toward a deal with Iran and that negotiations were going smoothly.

On the US Fed front, with the June 17 rate decision approaching, CME FedWatch data showed a 96.2% probability of rates remaining unchanged in June and an 84.3% probability of remaining unchanged in July. The market even began discussing the possibility of a rate hike, with CME data showing a 12.3% probability of a 25-basis-point rate raise in July.

Domestically, the manufacturing PMI for May released by the National Bureau of Statistics (NBS) came in at 50.0%, down 0.3 percentage points MoM, approaching the 50 mark. On monetary policy, the PBOC conducted 600 billion yuan in MLF operations in May, with a net injection of 100 billion yuan; reverse repo operations in early June trended toward precise regulation, with zero operation volume on some trading days, while overall liquidity remained ample.

Fundamentals: Export demand boost offsets domestic consumption off-season, destocking pace accelerates

Supply side, according to SMM data, China's aluminum production edged down slightly this week. The proportion of liquid aluminum rebounded 0.12 percentage points WoW, with moderate downstream liquid aluminum demand. The core focus remains on aluminum semis exports. On inventory, as of this Thursday, domestic aluminum ingot social inventory destocked 26,000 mt WoW from last Thursday and 11,000 mt from this Monday, with the destocking pace accelerating. Downstream processing sectors showed divergence—although in the off-season, strong export demand in some sectors partially offset weak domestic demand. Operating rates for secondary alloy, aluminum plate/sheet and strip, and aluminum foil declined on a weekly basis, while primary alloy operating performance recovered. Aluminum wire and cable and aluminum extrusion sectors remained generally stable. Overall, the weekly operating rate of leading downstream players edged down 0.1 percentage points WoW this week.

Overall, the macro tug-of-war between longs and shorts intensified. Under Middle East geopolitical risks, wait-and-see sentiment is expected to persist. The ex-China supply gap is expected to provide strong floor support for aluminum prices, and expectations of rising energy costs are also providing bullish momentum. However, high inventory pressure in China remains relatively evident, which is expected to limit upside room for domestic aluminum prices. In the short term, domestic aluminum prices are expected to mainly consolidate with range-bound trading. The most-traded SHFE aluminum contract is expected to trade in the range of 24,000-24,800 yuan/mt next week, with LME aluminum in the range of $3,650-3,800/mt.