Destocking pattern hard to reverse in the short term; aluminum prices consolidate and adjust in the near term [SMM Aluminum Morning Brief]

7.2 SMM Aluminum Morning Meeting Minutes

Futures: Futures: SHFE aluminum closed at 23,280 yuan/mt, edging up 0.22%, with intraday fluctuations between 23,145 and 23,295. The price was slightly above the 5-day MA (23,250) and 10-day MA (23,150.5), but well below the 30-day MA (23,409) and 60-day MA (24,028). Short-term moving averages provided limited support, while medium-term MAs still exerted bearish pressure. The MACD histogram showed DIF=-181.82, DEA=-272.64, and the negative histogram turned sharply positive to 181.64 (previously negative), forming a low-level golden cross, indicating that bearish momentum significantly weakened and bulls began to gain strength. Trading volume shrank to 59,200 lots, and the rebound lacked volume support. The recommended core trading range for SHFE aluminum is 23,100-23,600. LME aluminum closed at $3,170.5/mt, edging up 0.13%, with intraday fluctuations between 3,154.5 and 3,173. The price was slightly above the 5-day MA (3,166.8) and 10-day MA (3,162.35), but well below the 30-day MA (3,247.72) and 60-day MA (3,425.84). Short-term MAs provided support but medium-term bearish pressure was pronounced. The MACD histogram showed DIF=-62.39, DEA=-81.55, and the negative histogram turned positive to 38.31 (previously negative), forming a golden cross, with bearish momentum weakening. The recommended core trading range for LME aluminum is 3,150-3,200.

Macro front: The US-Iran conflict continued to escalate. On July 17, the US military launched further airstrikes against Iran, and Iran launched large-scale strikes on US targets in Kuwait and Syria, while also attacking US-related facilities in Bahrain. Iran warned that if the US continued its attacks on Iranian targets, Iran would expand its strikes to target US industrial, technological, and AI-related assets in the Middle East.

Fundamentals: Supply side, the proportion of liquid aluminum in China’s aluminum production rose by 0.37 percentage points WoW last week, mainly due to good performance of aluminum billet processing fees, which increased the share of direct molten aluminum supply and further reduced aluminum ingot casting volume; overseas, with ongoing production ramp-up of new projects and production resumptions, aluminum supply is expected to continue rising. Overall, however, the short-term global aluminum ingot destocking trend is unlikely to be reversed. Demand side, the downstream processing industry was in the traditional consumption off-season, with divergent sector performance but mainly under pressure. The operating rate of leading aluminum downstream processors recorded 61.3%, down 0.6 percentage points WoW. The SHFE/LME aluminum price ratio recovered, squeezing downstream export profits. As orders on hand were digested, the support from exports to demand is expected to weaken. Inventory side, domestic aluminum social inventory continued to destock this week. As of this Thursday, as of this Thursday, China’s aluminum ingot social inventory fell by 2,000 mt from last Thursday to 1.022 million mt, and by 25,000 mt from Monday.

Primary Aluminum Market: In early trading, the SHFE aluminum 2606 contract’s trading center was higher than the same period of the previous trading day. Affected by the off-season, market purchasing sentiment remained weak today, although overall purchasing sentiment improved MoM from yesterday, with ample supply circulating in the market. Transactions were concluded at parity to a discount of 20 yuan/mt against the SHFE aluminum August contract. In east China, the selling sentiment index closed at 3.11, flat MoM; the purchasing sentiment index was 2.90, up 0.01 MoM. Market sentiment in central China continued to rebound from the previous two days. As it was Friday, stockpiling demand from downstream processing enterprises was released, and trading firms engaging in both spot and futures market continued their strong stockpiling sentiment, providing solid support for prices. Additionally, suppliers showed a notable intention to hold prices firm and hold back from selling. Ultimately, the actual transaction prices in central China concentrated at a discount of 110-140 yuan/mt against the SHFE aluminum August contract, with an upward trend. In central China, the selling sentiment index was 2.99, up 0.05 MoM; the purchasing sentiment index was 3.03, up 0.12 MoM.

Secondary Aluminum Materials: Today, SMM A00 spot aluminum price closed at 23,220 yuan/mt, up 50 yuan/mt from the previous trading day. The aluminum scrap market remained steady overall. Regarding the price difference between A00 aluminum and aluminum scrap, on July 17, the price difference between A00 aluminum and mixed aluminum extrusion scrap free of paint in Foshan stood at 2,042 yuan/mt, and the price difference between A00 aluminum and shredded aluminum tense scrap was 728 yuan/mt, both remaining at extremely low levels. Supply-side constraints continued to strengthen, with the impact of the reverse invoicing policy deepening, increasing the scarcity of compliant invoice-bearing aluminum scrap. On the import side, China's imported aluminum scrap prices edged down this week. Imported shredded aluminum scrap prices at Ningbo port were lowered from 21,920 yuan/mt to 21,820 yuan/mt (tax inclusive), while at Tianjin port they dropped from 21,970 yuan/mt to 21,770 yuan/mt (tax inclusive). As overseas aluminum scrap quotations continued to pull back, orders for aluminum scrap imports from Southeast Asia into Guangdong increased recently compared to before, with the import window improving further. However, new transactions were still primarily concentrated on some low-priced resources and long-term clients, with limited spot market activity. The aluminum scrap market is expected to remain at high levels and move sideways. On the supply side, the reverse invoicing policy constraint is unlikely to reverse in the short term, and the tightness of invoice-bearing aluminum scrap will persist. On the import side, multiple bearish overlapping effects will gradually materialize in the coming months, keeping the supplement of high-quality overseas scrap low. On the demand side, as the off-season deepens, downstream operating rates will remain low, with no substantial improvement in terminal orders. Scrap utilization enterprises will continue purchasing as needed, and procurement sentiment will be hard to improve significantly. The price difference between A00 aluminum and aluminum scrap has narrowed to a historical low, sharply eroding the economic advantage of aluminum scrap over primary aluminum. If aluminum prices continue to decline, the substitution effect will accelerate.

Secondary Aluminum Alloy: The ADC12 market continued to run steadily today, with mainstream producers' quotes basically flat. The SMM ADC12 price remained stable at 24,100 yuan/mt from the previous trading day. On the one hand, recent aluminum price fluctuations were limited, lacking new cost-side drivers, while aluminum scrap supply remained tight, providing some support to secondary aluminum alloy prices and leaving enterprises generally reluctant to adjust prices. On the other hand, end-use demand stayed in the off-season, downstream orders were insufficiently released, and procurement was mostly need-based, resulting in subdued trading sentiment. Some enterprises reported that demand weakened further compared to earlier. Against the backdrop of a tug-of-war between longs and shorts amid cost support and weak demand, the market overall maintained a cautious, wait-and-see stance. ADC12 prices are expected to mostly move sideways in a narrow range in the short term, with focus on aluminum price fluctuations, changes in scrap supply, and improvement in downstream orders.

Outlook: With repeated Middle East tensions, lingering rate hike concerns, and continuous production resumptions, yet a destocking pattern hard to reverse in the short term, aluminum prices are expected to consolidate in the near term amid the tug-of-war between longs and shorts. Going forward, attention should be paid to the progress of production resumptions in the Middle East and geopolitical conflict trends, LME aluminum ingot inventory changes, and domestic downstream processing orders and aluminum semis export data.

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