The aluminum market prices experienced a continuous decline in July. By the end of July, the most-traded SHFE aluminum contract eventually fell below 19,000 yuan/mt, hitting a low of 18,785 yuan/mt, with a monthly decline of 5.7%. LME aluminum, affected by overseas macro factors and poor demand, further plummeted to $2,209.5/mt, marking a nearly five-month low. Meanwhile, the domestic aluminum spot market showed overall weakness in July, with the SMM A00 spot aluminum monthly average price around 19,737 yuan/mt, down 4.2% MoM. The spot market remained ample, continuing the spot discounts trend in July, with an average discount of 47.4 yuan/mt. The increase in supply and the off-season demand constrained aluminum prices in July. As we enter August, whether the fundamentals will have a positive outlook and whether aluminum prices can return to the glory of H1 remains to be seen.
First, on the domestic supply side: Since the resumption of aluminium production in Yunnan in March, the domestic aluminium supply has been restored, with operating capacity increasing month by month. By July, all aluminium smelters in Yunnan had resumed full production. Additionally, the contribution from new capacity in Inner Mongolia and the resumption of scattered capacity in Sichuan has maintained the trend of MoM and YoY growth in domestic aluminium production. According to preliminary estimates by SMM, the current total operating capacity of domestic aluminium is about 43.43 million mt, up 1.27 million mt YoY. In July (31 days), the total domestic aluminium output was about 3.68 million mt, up 3.2% YoY. From January to July, the total domestic aluminium output reached 24.86 million mt, up 5% YoY. However, in August, the MoM growth rate of domestic supply is expected to slow significantly, mainly due to the expectation of scattered resumption only in Sichuan, while other regions are expected to remain stable. SMM estimates that the aluminium output in August (31 days) will be around 3.69 million mt, stable MoM, and up about 1.9% YoY. Additionally, in Q4 2024, only about 200,000 mt of aluminium in Sichuan and Guizhou is expected to resume production. The annual output increase will also depend on whether sensitive areas like Yunnan will reduce production again during the dry season.
Regarding primary aluminium imports: In H1 2024, domestic primary aluminium imports increased significantly, reaching a new high. According to customs data, the total domestic primary aluminium imports in H1 2024 reached 1.219 million mt, up 151.1% YoY. The net import volume of primary aluminium in H1 reached 1.1907 million mt, up 178.28% YoY. Although the domestic primary aluminium import window has remained closed since April, some long-term contracts have continued to enter the Chinese market steadily each month. However, due to the long-term impact of import losses, the net import volume in June has fallen to around 110,000 mt. It is expected that in Q3, the import volume will mainly consist of long-term contracts, with an average monthly supplement of around 120,000 mt of aluminum ingots.
Demand side: In July, domestic aluminum downstream operations entered a slack season, with weak end-user demand from the automotive and PV sectors, leading to a sluggish operating rate for aluminum processing enterprises. According to SMM data, the comprehensive PMI index for the domestic aluminum processing industry in July 2024 was 41.80%, up 0.2 percentage points MoM, remaining below 50% for three consecutive months. By sector, the PMI for mainstream processing sectors such as domestic aluminium extrusion and plate/sheet, strip and foil remained below 50% in July, while the aluminium wire and cable sector performed well, with a PMI of 54.9%. In 2024, domestic aluminum supply was expected to grow by 3% YoY, with consumption shifting towards the PV, power, electronics and transportation sectors. However, in July, the end-user consumption growth for PV module production schedules and NEVs was lower-than-expected. Coupled with the continued weakness in traditional applications such as real estate, traditional aluminum processing enterprises have been concentrating on transitioning to these two sectors, leading to intense industry competition and a significant decline in industry profits. Entering August, factors such as high temperatures continue to affect aluminum processing, keeping it in a slack season. Although domestic political meetings have set economic development goals for H2, with plans to vigorously promote large-scale equipment upgrades and the replacement of durable consumer goods, the demand benefits brought by these policies will take time to be transmitted to the processing and manufacturing industries.
In terms of aluminum semis exports: In H1 2024, supported by improved export profits and moderate overseas demand, domestic aluminum semis exports maintained a YoY growth. According to customs data, the total export volume of domestic aluminum semis in H1 2024 increased by 14.8% YoY to 3.03 million mt. The export growth of products such as aluminum plate/sheet and strip and aluminum wire was among the highest in H1. In 2024, the overseas market, led by the US, frequently initiated anti-dumping measures and imposed tariffs on Chinese aluminum semis. Under these heavy trade barriers, there are significant concerns about the domestic aluminum semis export market. On July 30, the US Trade Office announced that the substantial 301 tariff measures originally scheduled to be imposed on a series of Chinese imports, including electric vehicles and their batteries, computer chips, and medical products, on August 1 would be delayed by at least two weeks. The market expects that before the policy is clearly implemented, overseas downstream aluminum companies may accelerate their stockpiling, thereby driving the increase in domestic aluminum semis exports in Q3.
Inventory Performance: In July, the overall performance of the domestic social inventory of aluminum ingots showed sluggish destocking. The total inventory quickly surpassed the 800,000 mt, 300,000 mt higher YoY. As of August 1, 2024, SMM statistics showed the total social inventory of aluminum ingots at 814,000 mt, (the amount for sale stood at 688,000 mt), up 24,000 mt WoW and up 13,000 mt from July 29, 289,000 mt higher YoY. It is worthy of attention that major domestic consumption areas experienced comprehensive inventory accumulation, making the early August inventory performance temporarily pessimistic. As of August 1, the domestic social inventory of aluminum billets was 129,200 mt, down 2,000 mt WoW and down 3,300 mt from July 29. According to an SMM survey, some sources from Guangxi have been shipped to Nanchang, putting significant pressure on the subsequent inventory and conversion margins of aluminum billets in Nanchang. The domestic aluminum billet inventory remains at a three-year high for the same period, 50,300 mt higher YoY. Regarding the future trajectory of domestic aluminum billet inventory, entering early August, with weak demand in the off-season but limited supply pressure, the domestic aluminum billet inventory is expected to remain stable, with the overall inventory likely to stay around 120,000-150,000 mt in August.
Finally, on the macro front: The US Fed kept the policy rate unchanged at its July meeting, but the overall tone was noticeably dovish, paving the way for a rate cut in September. On the evening of August 2, the US Bureau of Labor Statistics released data showing that US non-farm payrolls increased by 114,000 in July, much lower than the expected 175,000 and a sharp drop from the previous 206,000. Additionally, the US unemployment rate rose to 4.3% in July, higher than the expected and previous rate of 4.1%, exacerbating market concerns about the deterioration of the job market. This has led to increased trading on the logic of a recession in overseas economies, with the probability of a rate cut in September rising to 100%. The US dollar index is under pressure, together with the still tense situation in the Middle East, making macroeconomic risks from customs relatively uncertain. Domestic July PMI data showed that the manufacturing PMI was 49.4%, mainly due to the traditional production off-season, relatively insufficient demand, and the impact of extreme weather such as high temperatures and floods in some areas on producer operations. Both manufacturing and non-manufacturing business activities slightly declined.
Overall, entering August, although the US Fed's rate cut expectations have strengthened, recession expectations are suppressing commodities, and macro uncertainties remain. Attention should be paid to the progress of domestic economic stimulus policies. Fundamentally, in August, the domestic aluminum market will continue to experience a supply-demand mismatch with increased supply and weak demand during the off-season. It is expected that the social inventory of aluminum ingots will lack destocking momentum and may remain at a high level throughout the month. The destocking cycle is expected to arrive only when consumption improves in September. From the supply-demand perspective, it is difficult to drive aluminum prices upward. However, current spot aluminum prices have basically reached the 90th percentile cost line of the domestic aluminum industry. Especially after the sharp fall in LME aluminum, many aluminum producers in Europe and other regions have already experienced significant losses. Therefore, the cost is currently providing support to the aluminum market. Based on the above viewpoints, SMM expects that domestic aluminum prices in August may move rangebound.
Risk warning: The actual impact of domestic carbon emission policies on the supply side; overseas macro systemic risks; lower-than-expected domestic consumption growth.
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