Downstream off-season demand is weak, while geopolitical conflicts support consolidation in aluminum prices. [SMM Aluminum Morning Briefing]

SMM Aluminum Morning Briefing, 7.16

Futures: The most-traded SHFE aluminum 2608 contract closed at 23,255 yuan/mt, up 90 yuan or 0.39% from the previous trading day's settlement price. It opened at 23,190 yuan/mt and fluctuated in a range of 23,180-23,285 yuan/mt. Prices ran above the MA5 (23,185.00) and MA10 (23,094.00) but below the MA30 (23,411.33) and MA60 (24,031.00). The short- to medium-term moving averages displayed a bearish alignment and steadily converged lower, highlighting a pronounced consolidation on a subdued note, with resistance building at each moving average overhead. On the MACD indicator, DIF (-196.6528) stood above DEA (-292.7758), and the MACD red bar registered 192.2462, suggesting some easing of bearish momentum. The recommended core trading range for SHFE aluminum is 22,800-23,500 yuan/mt. The LME aluminum 3M contract settled at $3,172.00/mt, down 0.16%. Prices ran above the MA5 (3,165.30) and MA10 (3,157.15) but below the MA30 (3,262.47) and MA60 (3,433.06). The short- to medium-term moving averages also maintained a bearish alignment and converged lower, signaling a clear consolidation on a subdued note with significant resistance overhead. On the MACD indicator, DIF (-67.1167) remained above DEA (-86.2472), and the MACD red bar stood at 38.2611, indicating waning bearish momentum and a slowdown in the decline. The recommended core trading range for LME aluminum is $3,100-3,200/mt.

Macro Front: Sources revealed that Iran told Yemen's Houthi forces to blockade the Bab el-Mandeb Strait if the US attacks Iran's power grid. Iran's military stressed that the Strait of Hormuz issue is a "red line" for Iran and will not be reopened under US pressure. If hostile actions against Iran persist, the conflict will expand into new dimensions. US Central Command announced that US forces began a new round of airstrikes against Iran at 2 p.m. Eastern Time on July 16, marking the fifth consecutive night of US strikes. Some Iranian airports, bridges, and railway hubs were hit. White House Press Secretary Leavitt stated that Iran is still in talks with the US and hopes to reach a deal as it suffers "devastating blows." Leavitt said the recent US strikes stemmed from Iran's violation of the memorandum of understanding. Dallas Fed President Logan called for higher interest rates, noting that inflation does not appear to be sustainably returning to the central bank's 2% target. A moderate rate increase would better balance the outlook and risks under the Fed's dual mandate of price stability and full employment.

Fundamentals: On the supply side, the proportion of liquid aluminum in China's aluminum production rose 0.37 percentage points MoM this week, mainly due to strong performance in aluminum billet processing fees, which boosted the share of direct liquid aluminum supply and further reduced the amount of aluminum ingot casting. Outside China, aluminum supply is expected to continue rising amid ongoing production ramp-ups at new projects and production resumptions. But overall, the near-term destocking trend of global aluminum ingots is expected to be difficult to reverse. On the demand side, the downstream processing industry is in the traditional consumption off-season, with divergent sector performance but predominantly under pressure. The operating rate of downstream aluminum industry leaders recorded 61.3%, down 0.6 percentage points WoW. As the SHFE/LME price ratio recovered, downstream export margins shrank. With orders on hand being fulfilled, the support from exports for demand is expected to weaken. On the inventory side, China's aluminum social inventory continued its destocking trend this week. As of Thursday, China's aluminum ingot social inventory destocked by 54,000 mt WoW and by 23,000 mt from Monday. Aluminum prices mainly moved sideways this week, downstream demand was sluggish, buying sentiment was somewhat cautious, and warehouse withdrawals slowed down.

Primary Aluminum Market: In early trading, the trading center of the SHFE aluminum 2606 contract was at a lower level compared to the same period the previous trading day. Affected by the off-season, the market purchase sentiment remained weak today, dominated by just-in-time procurement, with ample market liquidity. Market transactions were made between parity and a discount of 20 yuan/mt against the SHFE aluminum 08 contract. The selling sentiment index in east China was 3.11 today, flat MoM; the purchase sentiment index was 3.04, up 0.04 MoM. Trading sentiment in the central China market recovered slightly again today compared to the previous two days; downstream processing enterprises showed initial fear of high prices, while their purchase willingness improved markedly. Meanwhile, traders' hedging buying sentiment persisted, with concentrated, large-volume purchases driving suppliers to hold prices firm. Ultimately, the actual transaction price range in the central China market was around a discount of 140-160 yuan/mt against the SHFE aluminum 08 contract. The selling sentiment index in central China was 2.81 today, up 0.02 MoM; the purchase sentiment index was 2.24, up 0.02 MoM.

Secondary Aluminum Materials: SMM A00 spot aluminum price closed at 23,180 yuan/mt today, down 90 yuan/mt from the previous trading day. The overall aluminum scrap market remained stable and unchanged. In terms of price spreads, on July 15, the price difference between A00 aluminum and mixed aluminum extrusion scrap free of paint in Foshan was 2,072 yuan/mt, and the price difference between A00 aluminum and shredded aluminum tense scrap was 758 yuan/mt. Supply-side constraints continued to strengthen, with the impact of the reverse invoicing policy further deepening. News came from Shandong province about a pause on reverse invoicing starting in July, while production cuts and shutdowns spread among small and medium-sized scrap utilization enterprises in Anhui, Jiangxi, Hubei, and other regions, further increasing the scarcity of compliant, invoiced aluminum scrap. On the import front, due to a 1-3 month shipping lag, arrivals of high-quality overseas supply, already scarce due to a previously inverted price spread, remained low from June to August. Meanwhile, the UAE's aluminum scrap export ban and EU tariff hikes further tightened the overseas aluminum scrap supply. The aluminum scrap market is expected to maintain a narrow sideways trend this week, shaped by demand suppression and cost support, with the mainstream shredded aluminum tense scrap (aluminum content-based pricing) trading range around 19,900-20,500 yuan/mt. The pullback in spot primary aluminum prices limited the extent of further narrowing in the price spread between A00 aluminum and aluminum scrap. The economic advantage of aluminum scrap over primary aluminum is unlikely to disappear in the short term, and support for aluminum scrap prices from the demand side remains intact. If aluminum prices continue to decline further, the substitution effect of primary aluminum for aluminum scrap will accelerate and become more evident.

Secondary Aluminum Alloy: Spot market: ADC12 market quotes remained generally stable today, with enterprises showing limited willingness to adjust prices. On one hand, aluminum prices fluctuated within a narrow range recently, and the cost side lacked clear drivers, keeping market quotes relatively steady. On the other hand, as the traditional consumption off-season deepened, downstream end-users such as the automotive sector were gradually affected by high-temperature holidays, leading to a phased pullback in orders. Destocking expectations for the second half of the month gradually strengthened, weakening demand support. However, in the current market environment, both sellers and buyers maintained a cautious stance with limited willingness to compete on price, and low-price shipments had a relatively limited effect on improving transactions. Consequently, the market was primarily characterized by purchasing as needed and concluding deals at stable prices. In the short term, ADC12 prices are expected to continue moving sideways.
Comprehensive Outlook: With repeated turmoil in the Middle East, persistent concerns over interest rate hikes, and ongoing supply-side recovery, the destocking trend remains difficult to reverse in the short term. Amid the tug-of-war between longs and shorts, aluminum prices are expected to consolidate and adjust in the near term. Future attention should focus on progress in Middle Eastern production resumptions and the trajectory of geopolitical conflicts, LME aluminum ingot inventory changes, as well as domestic downstream processing orders and aluminum semis export data.

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