Bearish Macro Factors and Fundamentals to Pressure SHFE Aluminium in the Short Term

SHANGHAI, Jun 27 (SMM) - The most-traded SHFE aluminium contract went down last week, with its weekly low and high at 18,960 yuan/mt and 19,955 yuan/mt respectively before closing at 18,970 yuan/mt on Friday afternoon, down 835 yuan/mt or 4.22% on the week. LME aluminium opened at $2,500/mt last Monday and hit a weekly high of $2,541.5/mt before trading at $2,463/mt as of CST 15 on Friday, down 1.48% on the week. 
Macro front: US Federal Reserve Chairman Jerome Powell said on June 22 that the US Fed is firmly committed to bringing inflation down and is taking swift action to restore price stability. On the same day, European Central Bank President Christine Lagarde reiterated plans to raise interest rates by 25 basis points in July and hike interest rates again in September. On June 24, Fed Governor Bowman expressed support for the Fed to raise interest rates by another 75 basis points at the FOMC monetary policy meeting in July, and said it would be appropriate to raise interest rates by 50 basis points at subsequent meetings. Overseas interest rate hikes pressured the commodities as a whole.
Fundamentals: The growth rate of domestic operating aluminium capacity slowed down in June. Chinalco Liancheng brought 385,000 mt of capacity back into production, while Guangxi Baikuang Longlin’s new capacity ramped up, which is expected to reach 200,000 mt in early July. The domestic operating aluminium capacity is likely to climb 250,000 mt MoM to around 40.85 million mt by the end of this month. On the demand side, construction aluminium extrusion and aluminium plate/sheet, strip and foil producers received limited new orders. On the whole, the operating rates across the aluminium processing sectors will fall in July-August, which is the traditional off-season. Poor orders from the real estate sector will also weigh on the operating rates. The production schedules of aluminium cable enterprises were less tight than before as high temperature slowed cargo pick-up by end users. Only orders from the automotive and photovoltaic sectors were relatively optimistic. The overseas orders for aluminium semis declined, and the exports are unlikely to exceed previous high as export profits shrank amid rising SHFE/LME aluminium price ratio. 
Following a long period of decline in aluminium prices, roughly 2.5% of the domestic aluminium production capacity has already suffered losses, but the operating capacity is still on the rise. At present, the domestic demand is gradually recovering from the pandemic, and the aluminium ingot social inventories remain in a destocking cycle. In the short term, growing domestic aluminium supply, combined with overseas interest rate hikes and economic recession, will put downward pressure on aluminium prices. Nevertheless, low aluminium inventories and marginal costs should constrain the downside room of aluminium prices. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 18,500-19,800 yuan/mt and $2,300-2,550/mt respectively this week.