Fundamentals mixed, aluminum prices expected to consolidate on a subdued note [SMM Aluminum Weekly Review]

SMM Nov 5 news:

Macro front: Ex-China, the US Fed decided to keep the federal funds rate unchanged at 3.75%-4% at its October FOMC meeting by a 10-2 vote. Governor Cook and Cleveland Fed President Hammack advocated a 25 bp rate hike. The statement upgraded the economic assessment to "strong expansion." Chair Warsh stressed the anti-inflation stance and rejected a "soft inflation target," without giving clear guidance on December policy. US CPI rose 3.7% YoY in September, with core CPI up 2.6% YoY, showing persistent inflation stickiness. CME data showed the probability of a 25 bp hike in December remained high, extending tightening expectations and weighing on dollar-denominated base metals valuations. After the meeting, the US dollar index pulled back in the short term but overall held up well. Meanwhile, the final University of Michigan consumer sentiment index for October came in at 48.0, near a historical low. Although the Conference Board's October confidence index unexpectedly rebounded to 91.7, the ongoing Middle East conflict continued to push up energy prices, leaving the economic outlook still pessimistic.

Fundamentals:

Supply side, China's operating aluminum capacity stayed high, and weekly aluminum production in China continued to edge up this week. Ex-China, production resumptions at Middle East capacity that had cut production progressed slightly faster than expected, and with new capacity in Indonesia coming online, aluminum supply continued its recovery trend. LME aluminum inventory held near 229,000 mt, a near 20-year low.

Demand side, aluminum prices retreated after a rapid rise this week. Early in the week, supported by low inventory, SHFE aluminum briefly shot up above 23,400 yuan/mt, then fell for consecutive sessions to around 22,900 yuan/mt. Downstream purchases were mainly restocking as needed, with limited willingness to chase higher prices. On Thursday this week, China's social inventory of aluminum ingot fell 28,000 mt WoW from last Thursday, providing some support to aluminum prices. However, the aluminum processing industry's composite PMI fell below the 50 mark to 48.9% in October, and signals of weakening downstream processing demand increased as the peak season drew to a close. The proportion of liquid aluminum edged down MoM this week.

Overall, the macro perspective features a tug-of-war between hawkish tightening expectations and a short-term rebound in the weak US dollar. On fundamentals, destocking provides a floor, but downstream processing demand is weakening and the peak season is nearing its end, leaving fundamentals also mixed. Aluminum prices are expected to consolidate on a subdued note in the short term. Next week, the front-month SHFE aluminum contract is expected to trade at 22,800-23,600 yuan/mt, and the most-traded contract at 22,500-23,300 yuan/mt. LME aluminum is expected to trade at $2,950-3,090/mt. Going forward, close attention should be paid to China's aluminum semis exports and the sustainability of destocking.

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