Aluminum prices experienced a significant pullback, with inventory leading the turnaround [SMM Analysis]

In mid-June, especially after the Dragon Boat Festival holiday, domestic aluminum prices quickly retreated from their high levels. Against a bearish fundamental, SMM A00 spot aluminum prices fell from 21,170 yuan/mt on the last trading day before the Dragon Boat Festival to 20,380 yuan/mt on June 17, a drop of nearly 800 yuan/mt, or 3.7%. As of June 19, the most-traded SHFE aluminum contract had recorded six consecutive days of decline, and spot prices remained in a discount, with market confidence on the verge of collapse. At this critical juncture, after the weekend, the social inventory of aluminum ingots saw a dual decline, marking the first sign of a turnaround in inventory performance.

On June 17, 2024, SMM reported a total social inventory of aluminium ingots at 769,000 mt, with domestic aluminum inventory for sale stood at 643,000 mt, down 12,000 mt from a week ago. Comparing YoY data from the past two years, domestic aluminum ingot inventory is still nearly 250,000 mt higher than the same period last year, and has narrowed to 16,000 mt compared to the same period in 2022. In terms of pick-up from warehouses, affected by the Dragon Boat Festival holiday, last week's domestic aluminum ingot pick-up from warehouses decreased by 18,600 mt to 99,700 mt.

SMM believes that the destocking on weekends boosted market confidence, stabilizing spot prices. Although recent cargo pick-up and inventory data are still unsatisfactory, the short-term domestic aluminum ingot inventory level remains unable to support aluminum fundamentals. However, the market's acceptance of the adjusted aluminum price level has increased, and downstream willingness to restock at lower prices strengthened, stimulating market demand to some extent. Over the weekend, aluminum ingot pick-up in south China increased by 3,600 mt WoW to 9,300 mt, while Wuxi also saw an increase of 1,600 mt to 19,600 mt, with central China showing positive feedback. In terms of arrivals, although the market believes that the short-term decline in aluminum prices may delay the shipment pace of aluminum plants, according to SMM statistics, the shipment of domestic aluminum plants remains at normal levels, and the recent arrivals in major domestic consumption areas stabilized.

Regarding the domestic aluminum ingot inventory, despite volatile performance of aluminum ingot inventory in June due to multiple factors, the full resumption of billet factories in Guangxi at the beginning of June led to a certain expectation of a decline in local ingot production. The significant retreat of spot aluminium prices from their high levels at the beginning of June stimulated market demand, resulting in signs of inventory reduction. The domestic aluminum ingot inventory is expected to drop slowly, potentially falling to 700,000 mt by the end of June.

Despite a reduction in domestic aluminum billet inventory after the weekend, the decrease in aluminum billet inventory was affected by a short-term reduction in arrivals compared to aluminum ingot inventory. From the recent performance of downstream operating rates, conversion margins, and market feedback, although aluminum prices dropped significantly, the aluminum billet market remains relatively weak during the off-season, affecting the shipment of billet factories. Over the weekend, arrivals of aluminum billets in south China decreased by 3,700 mt WoW to 5,700 mt, while cargo pick-up from warehouses decreased by 1,200 mt WoW to 7,700 mt, showing a short-term weak supply and demand during the off-season. Other regions also stabilized. As of June 17, domestic aluminum billet social inventory was 157,300 mt, down 5,500 mt from Jun 13, still at a high level for the same period in nearly four years, with the YoY gap narrowing to 13,800 mt. Aluminum billet pick-up from warehouses slightly stabilized, increasing by 1,400 mt to 42,400 mt.

However, SMM believes that the stable domestic aluminum billet pick-up from warehouses is still a positive signal for the market. Regarding the subsequent domestic aluminum billet inventory, since the inventory has been declining for a long time, SMM estimates that due to the impact of increased supply within the month and weak downstream demand during the off-season, the difficulty of destocking domestic aluminum billet will remain high. It is expected that the inventory in June will fluctuate between 150,000 and 200,000 mt.