China Aluminum Inventory Pullback, Multiple Factors in Play as Aluminum Price Drifts Higher [SMM Aluminum Morning Meeting Notes]

Aug 6 SMM Morning Aluminum Briefing

Futures: The most-traded SHFE aluminum 2609 contract closed at 23,835 yuan/mt, up 70 yuan from the previous settlement price, a gain of 0.29%. It opened at 23,785.00 yuan/mt today and fluctuated in a range of 23,740–23,905 yuan/mt. Prices were trading above the MA5 (23,740.00), MA10 (23,542.00), MA30 (23,191.33), and MA60 (23,741.00). The medium and long-term moving averages remained in a bearish alignment, continuing to exert downward pressure. The pattern of consolidating at lows and drifting higher persisted, with the higher range above forming key resistance. The MACD indicator showed the DIF (93.4473) above the DEA (-3.5285) and the MACD histogram at 193.9515. Bearish momentum continued to wane, while bullish recovery momentum remained strong. The recommended core trading range for SHFE aluminum is 23,500–24,100 yuan/mt. The LME aluminum 3M contract closed at $3,253.00/mt, up 0.22%. It opened at $3,245.00/mt today and fluctuated between $3,233.00 and $3,256.00/mt. Prices were trading above the MA5 (3,227.70), MA10 (3,199.45), and MA30 (3,164.40) but below the MA60 (3,349.41). The medium and long-term moving averages remained in a bearish alignment and were gradually pressing downward. An overall pattern of consolidation and recovery at lows emerged, with the 60-day moving average above forming significant resistance. The MACD indicator showed the DIF (-6.0545) above the DEA (-25.1982) and the MACD histogram at 38.2874. Bearish momentum continued to wane, and the rebound from lows persisted. The recommended core trading range for LME aluminum is $3,200–$3,350/mt.

Macro front:Iranian Foreign Ministry Spokesperson Baghai said Iran and Oman have reached an agreement on shipping routes in the Strait of Hormuz. Barring third-party interference, the joint statement is now in the final review and drafting stage. Baghai also stressed that the agreement does not mean safe navigation through the Strait of Hormuz will be restored. Iranian Deputy Foreign Minister Gharibabadi said the agreement between Iran and Oman on commercial vessel passage through the Strait of Hormuz is close to being finalized. Under the agreement, both the northern lane under Iran’s control and the southern lane near Oman will be closed, and a new transit model differing from that of the past 60 years will be established in the Strait of Hormuz. The new passage will also be temporary and is expected to be usable for 2 to 4 months. Gharibabadi said Iran has received a message from the US indicating the US is ready to resume fulfilling its commitments under the previously signed memorandum of understanding. Fed Governor Cook said she would be prepared to support rate hikes if the disinflation trend does not resume; the risk that inflation is too high is rising and could become entrenched in the economy; there are reasons to believe inflation may ease; so far policy has not caused significant unemployment; and the Fed may ultimately still not need to raise rates.

Fundamentals: The easing of geopolitical tensions in the Middle East continued to deflate geopolitical risk premiums, while overseas aluminum production resumptions and new capacity ramp-ups persisted. Market expectations for the global aluminum market shifting from tight to loose continued to limit upside room for aluminum prices. Expectations for US Fed interest rate hikes fluctuated, but in the short term, rate-hike expectations converged, while the rising proportion of liquid aluminum in China provided some support for aluminum prices. On the domestic inventory front, China's aluminum social inventory fell by 25,000 mt MoM from Monday to 933,000 mt on Thursday, and dipped by 20,000 mt WoW from last Thursday, as the destocking of aluminum ingots recovered.

Primary Aluminum Market: In the morning session, the SHFE aluminum 2608 contract edged slightly higher against the previous day's center, while downstream purchasing sentiment stayed soft. The aluminum price center lifted, and the pace of destocking moderated slightly. The SHFE aluminum night session retreated after a bounce, and there were some divergences in market quote sentiment. Spot premiums for SHFE aluminum mainly transacted around 8-40 yuan/mt against the 08 contract to 08-20 yuan/mt against the 08 contract today. In east China, the selling sentiment index stood at 3.10, up 0.01 MoM; the purchasing sentiment index was 2.86, up 0.06 MoM. Today, the futures market center slid slightly compared to the previous day's morning session, and premiums were relatively wide, strongly driving central China traders to hold prices firm and hold back from selling confidence, pushing market prices persistently higher, while the selling sentiment index continued to slide. Transactions were mostly executed for hedging and profit-taking between spot cargo and futures traders, while downstream processing enterprises showed limited purchasing interest. Eventually, actual transaction prices in central China aligned around a discount of 170-200 yuan/mt against the SHFE aluminum 08 contract. In central China today, the selling sentiment index stood at 2.99, dipping 0.2 MoM; the purchasing sentiment index was 2.94, up 0.03 MoM. Today, spot aluminum prices ticked downward, yet the spot market showed resilience again. Tight arrivals combined with a destocking trend remained unchanged, while absolute prices stayed relatively resilient, with most suppliers regaining confidence in holding prices stable and selling slowly, and only a few still seeking to liquidate as needed adjusting slightly lower with limited low-priced dumping, with quotes seen at discounts of 10-0 yuan, keeping circulating pressure controllable. Downstream demand stayed mediocre, with enterprises purchasing as needed and showing limited willingness to take on more at current price levels, but traders showed improved enthusiasm in entering the market to buy at discounts, and market participants generally accepted the rising prices, resulting in overall satisfactory transactions.

Aluminum Scrap: Today, SMM A00 spot aluminum prices closed at 23,690 yuan/mt, a slight correction of 40 yuan/mt from the previous day, with aluminum scrap prices generally holding steady across regions. On the scrap spread front, on August 5, the price difference between A00 aluminum and mixed aluminum extrusion scrap free of paint in Foshan stood around 2,130 yuan/mt, while the price spread between A00 aluminum and shredded aluminum tense scrap was about 930 yuan/mt. In the off-season backdrop, aluminum scrap suppliers' willingness to sell at price dips remained limited, keeping aluminum scrap prices generally resilient. Demand side, as the high-temperature holiday arrived, operating rates at downstream cast aluminum alloy enterprises dropped and orders shrank. Secondary aluminum plate/sheet and strip enterprises maintained moderate operating rates, but overall raw material demand support weakened significantly compared with Q2. In the short term, supply-side tightness of compliant invoiced cargoes persists, and suppliers' insufficient willingness to sell at low prices provides bottom support for prices. Import side, the lagged effects of the UAE's export ban and the EU's additional tariffs will gradually emerge in the coming months, with port arrivals maintaining low levels from June to August. Demand side, the sluggish downstream order trend is hard to reverse in the near term, and scrap utilization enterprises are likely to continue purchasing as needed and maintaining low inventories, making it hard for the purchasing sentiment to improve significantly.

Secondary aluminum alloy: Spot: Today, ADC12 market prices remained stable overall, with the industry showing weak willingness to adjust prices. On the cost side, aluminum prices pulled back somewhat but by limited margins, and enterprises lacked the willingness to actively follow the decline. On the demand side, the market remained in the off-season, and spot prices were constrained by weak demand, limiting upside room. Recently, futures performance was strong, and the spread between futures and spot prices continued to narrow. Since late July, the spot-futures price spread gradually compressed from highs, and the futures-spot structure has basically returned to parity. As futures rose while spot prices followed only with limits, the inquiry enthusiasm from futures-spot traders picked up somewhat. If futures further strengthen and the futures premium widens going forward, this may reopen arbitrage opportunities, driving traders to purchase spot cargoes. In the short term, the market will continue to consolidate amid cost support and weak demand, with prices moving sideways.

Overall Outlook: The macro front has recently improved. The US Fed's decision to hold interest rates steady in the short term has reduced marginal constraints on the non-ferrous metals sector. China's rising proportion of liquid aluminum and the destocking recovery in domestic aluminum inventories have jointly supported aluminum prices. Meanwhile, the continuous launch of overseas aluminum capacity over the longer term, weak traditional end-use demand in China during the off-season, and the recent easing of geopolitical tensions in the Middle East are creating some pressure on aluminum prices. Aluminum prices are expected to consolidate on a strong note.

[The information provided is for reference only. This document does not constitute direct investment research advice. Clients should make decisions prudently and not rely solely on this as a substitute for independent judgment. Any decisions made by clients are not associated with SMM.]