SHFE Aluminium to Climb Further amid Improved Macro Sentiment, But the Upside Room Will Be Constrained by Poor Fundamentals

SHANGHAI, Aug 1 (SMM) - The most-traded SHFE aluminium contract opened at 18,050 yuan/mt last Monday, with its weekly low and high at 17,710 yuan/mt and 18,805 yuan/mt respectively before closing at 18,795 yuan/mt on Friday afternoon, up 800 yuan/mt or 4.45% on the week. LME aluminium opened at $2,459/mt last Monday, with its weekly low and high at $2,371/mt and $2,496/mt respectively before trading at $2,473.5/mt as of CST 15 on Friday, up 2% on the week.
On the macro front, in the early morning of July 28, the US Federal Reserve announced to raise the interest rate on reserve balances (IOR) from 1.65% to 2.4% while hiking the discount rate by 75 basis points to 2.5%, in line with market expectations. The Fed declared that continued rate hikes are appropriate and said it is firmly committed to bringing inflation back to its 2% target. In China, the Politburo meeting of the CPC Central Committee emphasized that the macro policy should be centred on expanding the demand. Fiscal and monetary policies should effectively make up for the lack of social demand. Monetary policy should maintain reasonable and sufficient liquidity, increase credit support for enterprises, and make good use of new credit and infrastructure building investment funds from policy banks.
Fundamentals: The domestic aluminium supply remained stable last week. Although the power shortages in Sichuan has been relieved, local aluminium smelters did not resume the production on a large scale and remained committed to their maintenance plans. The restarts of idled capacity in Guangxi was proceeding slowly. According to preliminary estimates by SMM, the operating aluminium capacity across China stood at around 41.4 million mt in late July, which was lower than expected. The operating rates of domestic aluminium downstream sectors remained low last week, with extrusion and cable sectors performing the worst due to poor orders. The operating rates are vulnerable to decline in the short term due to the off-season. The domestic aluminium ingot social inventories have stopped falling. 
Market concerns eased as the US interest rate hike met expectations. The Chinese government emphasized efforts to stabilise the real estate market and delivery of housing, which boosted sentiment in the aluminium market. Despite deepening losses among smelters, the domestic aluminium supply continued to increase. This, coupled with weak downstream demand, will cap the gains of aluminium prices. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 17,800-19,300 yuan/mt and $2,400-2,550/mt respectively this week.