Domestic aluminum ingot destocking encountered obstacles again in June, leaving limited room for inventory decline in July

In June, domestic aluminum ingot inventory encountered obstacles again, narrowly fluctuating around 750,000-800,000 mt over the past month. Entering early July, domestic aluminum inventory performance was still disappointing, with both aluminum ingot and billet inventories increasing after the weekend, both at the highest levels for the same period in the past three years. Since June 20, the social inventory of domestic aluminum ingots has been accumulating for more than half a month, with a cumulative increase of 35,000 mt. The weak inventory performance pushed domestic aluminum ingot inventory close to the 800,000 mt. On July 8, 2024, SMM statistics showed that the total social inventory of aluminum ingots was 791,000 mt, and the domestic circulating inventory of aluminum was 665,000 mt, with a significant increase of 18,000 mt from July 4, an increase of 9,000 mt MoM, and 261,000 mt higher YoY. Comparing the data and considering the annually increasing proportion of aluminum liquid, SMM believes that the current aluminum ingot inventory is relatively high, with sufficient market supply, which is the main reason why aluminum prices have difficulty recovering to a premium after falling.

What is hindering the destocking of domestic aluminum ingots? SMM believes there are two reasons:

(1) Supply side: The production of aluminum smelters in Yunnan is gradually resuming, and the supply of aluminum ingots remains ample. The concentrated arrivals of aluminum ingots are the main reason for the inventory accumulation since July. In the past two months, there has been a significant increase in domestic ingot production. According to SMM's monthly survey, the capacity awaiting resumption in Yunnan was almost fully put into production in June, and part of the capacity of the third phase of Huayun in Inner Mongolia also reached full production. The operating capacity of domestic aluminum continued to rise in June. However, as downstream entered the traditional off-season, billet factories and other intermediate processing plants reduced production or underwent maintenance, resulting in the proportion of aluminum liquid failing to rebound as expected and instead showing a downward trend. The proportion of aluminum liquid in June decreased by 1.4 percentage points MoM and 0.1 percentage points YoY to around 71.85%. In June, as downstream entered the traditional off-season, the weak demand led to the reduction or suspension of production and technical renovations in billet factories, resulting in an increase in ingot production. Based on SMM's aluminum liquid proportion data, the domestic aluminum ingot production in June increased by 6.41% YoY to around 1 million mt. According to SMM surveys, the downstream off-season atmosphere is still strong, and there are no significant signs of demand recovery in July. It is expected that the proportion of aluminum liquid in July can only slightly rebound to around 73%.

(2) Demand side: In the off-season, the operating rate of downstream is difficult to improve, and the rigid demand for procurement is insufficient. The low conversion margin of primary processed aluminum products such as aluminum billets has replaced some of the demand for aluminum ingots. The recent pullback in aluminum prices has stimulated some market demand, and downstream enterprises have taken advantage of the low prices to replenish their inventories. However, amid overall low operating rate of downstream in the off-season, the short-term increase in pick-up from warehouses is insignificant. Compared with the same period in previous years, the pick-up data is weak and cannot support the continuous destocking of aluminum ingots. While the low conversion margin of aluminum billets squeezed some of the demand for aluminum ingots, although the import window for domestic aluminum ingots was closed in Q2, some downstream enterprises hold some long-term overseas aluminum orders. It is reported that some long-term contract prices are slightly lower than domestic primary aluminum prices, which inhibited the reduction of aluminum ingot inventory in some regions of China.

From March to June each year is usually the destocking period for the social inventory of aluminum, especially in March and April when the market enters a rapid destocking state. After the Chinese New Year this year, the peak of domestic aluminum social inventory reached 870,000 mt, a historical high level. However, in Q2 this year, the social inventory of aluminum failed to drop and remained above 750,000 mt for a long time. The pick-up data was also weaker than the same period in previous years. SMM believes that the continuous inventory accumulation for nearly half a month dampened the market's confidence in the destocking of aluminum ingots in the off-season. Based on the current supply and demand situation, it is expected that the decline of domestic aluminum ingot inventory in July is relatively limited, and the inventory will still fluctuate around 750,000-800,000 mt. In a relatively optimistic scenario, the domestic aluminum ingot inventory is expected to slightly decrease to around 750,000 mt by the end of July.