Aluminium prices to move rangebound due to decline in interest rate cut expectations and inventory accumulation

The macroeconomic sentiment was hit last week. The domestic market continued to stressed efforts to promote economic recovery, Shanghai, Suzhou and other places relaxed or even cancelled real estate purchase restriction policies, boosting domestic real estate market and macroeconomic market confidence. However, at the meeting in January, US Fed maintained the target range of the federal funds rate at 5.25-5.5%. Although the US Fed's monetary policy decision removed statement suggesting further interest rate increases, Chairman Powell believed that the possibility of an interest rate cut in March was low, and the US Fed was cautious in cutting interest rates. This was not in line with expectations, disrupting market sentiment.

Fundamentals: Domestic aluminium enterprises maintained steady operations. There were rumours that aluminium enterprises in Yunnan may resume production in March. As power supply shortage in the province was not prominent, operating aluminium capacity in the dry season may hold stable. Local enterprises reported that there was no clear notice on production resumption for the time being, and production remained stable. Operating rate of domestic aluminium liquid downstream processing enterprises inched lower in January, with aluminium billets industry reducing more production. It was expected that the domestic aluminium liquid ratio will fall MoM to below 70%. As CNY holiday is drawing near, the ratio saw a seasonal decline. In terms of cost, alumina spot market prices rose slightly, driving up the immediate cost of domestic aluminium. As of Feb 1, the immediate cost of domestic aluminium was around 16,884 yuan/mt, up 9 yuan/mt WoW. Overseas: On Jan 24, the New Madrid factory in Missouri announced that it would shrink operations, and planned to lay off more than 400 employees. The company stated that energy costs and environmental issues were important reasons for the closure of the smelter, and has no plans to restart it. The smelter's total production capacity was 276,000 mt, with operating rate at about 50%. After the production reduction, there will be only four primary aluminium smelters left in the US, dragging down primary aluminium output by 20% to about 670,000mt/year. Demand: Operating rate of domestic downstream processing companies continued to weaken during the week. Small and medium-sized building extrusion and aluminium plate/sheet, strip and foil companies will take a 10-20 day break. Operating rate in the downstream was hit by environmental protection in Henan and rainy and snowy weather. Operating rate at industrial aluminium extrusion and other sectors also saw a seasonal decline. In the short term, downstream operating rate will mainly remain low, weakening domestic aluminium spot transactions. Aluminium ingots and aluminium billets inventory has increased, and spot premiums continued to fall.

From a technical perspective, the model predicts that the price range of the closing price of most-traded SHFE aluminium contract will be [18,735, 19,430], the price center will be 19,060, the unit is yuan/mt, the extreme price range will be [18,380, 19,770], the normal price range will be [18,620, 19,540], and the conservative price range will be [18,850, 19,320]. The price is expected to bottom out or rise. The support range will be [18,620, 18,850], and the resistance range will be [19,320, 19,540]. The model predicts that the range of the average price of SMM A00 aluminium will be [18,690, 19,145], with the price center of 18,930, and the unit is yuan/mt. The extreme price range will be [18,400, 19,430], the normal price range will be [18,590, 19,240], and the conservative price range will be [18,790, 19,050]. The price trend is expected to rise initially and then fall back, or remain firm. The support range will be [18,590, 18,790], and the resistance range will be [19,050, 19,240].

Summary: On the macro front, the Federal Reserve maintained its first interest rate in 2024, and its statement was hawkish. Expectations for an interest rate cut in March fell back, and the US index rebounded, suppressing commodities. In China, the macroeconomic environment was positive. The implementation of real estate “white list” and relaxation of purchase restrictions in Guangzhou, Suzhou and Shanghai greatly boosted domestic market sentiment. In terms of fundamentals, the domestic aluminium operation is generally stable. The market is generally concerned about the time of production resumption in Yunnan. Downstream consumption weakened as small and medium-sized enterprises took CNY holidays. The aluminium market entered a traditional inventory accumulation but the inventory continued to remain low before CNY. This, coupled with a high aluminium liquid ratio in 2024 CNY holidays, resulting in peak of aluminium inventory after CNY holiday lower than levels for the same period of previous years. From a macro perspective, the Fed's interest rate cut expectations declined, but domestic expectations improved, coupled with low expectation for total inventory after CNY holiday, the aluminium market has no major negative factors and is expected to move rangebound before CNY holiday. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 18,620-19,540 yuan/mt and $2,180-2,320/mt respectively this week. We will continue to pay attention to domestic inventory changes and related news in Yunnan.