Mid-Autumn Festival is approaching, Analysis of Domestic Aluminum Inventory by SMM

In mid-August, domestic aluminum ingots began to drop. The inventory peak in H2 temporarily appeared at 830,000 mt on August 5. However, destocking of domestic aluminum ingots in late August did not go smoothly, and by the end of August, it had still not crossed the 800,000 mt mark. In the second half of August, the domestic aluminum ingot spot market experienced a period of caution and hesitation. The high YoY inventory data, the sluggish construction materials market, and successive trade blowups challenged market confidence in the peak season consumption performance as September approached, especially in the heavily impacted South China. The market will need some time to digest this. In other words, in August, the market had limited confidence in the rapid destocking of domestic aluminum ingot during the September-October peak season. According to SMM, the sharp rebound in aluminum prices recently is largely due to the better-than-expected destocking performance in September compared to the weak expectations in August.

Entering September, domestic aluminum ingot destocking accelerated, breaking through the 800,000 mt and 750,000 mt marks successively, slightly exceeding our previous expectations, which is noteworthy. Currently, domestic aluminum ingots have been in a nearly two-week accelerated destocking phase. As of September 12, 2024, SMM statistics show that the total social inventory of aluminum ingots is 748,000 mt, with domestic available aluminum inventory of 622,000 mt, down 20,000 mt from this Monday and down 46,000 mt from last Thursday. Since the peak in August, the destocking has reached 82,000 mt. Compared with the same period last month, it has fallen by 60,000 mt, but it is still 244,000 mt higher YoY. This number is gradually decreasing. The domestic aluminum ingot destocking performance in the "September-October" peak season deserves continued attention.

By region, due to the impact of regional price spreads and differences in downstream demand, inventory performance varied before the Mid-Autumn Festival. According to an SMM survey, despite the window for inter-regional shipment transfers not opening, the recent price spread between Henan and Shanghai led some aluminum plants to adjust their shipping plans and schedules, resulting in a decrease in in-transit shipments to East China while those to Central China increased significantly. These shipments are expected to arrive in batches before the Mid-Autumn Festival. Consequently, the inventory in Gongyi increased by 3,000 mt mid-week, while Wuxi's inventory decreased by 18,000 mt from Monday, making it the best-performing area in recent destocking. In South China, due to a slight increase in arrivals MoM, the destocking speed slowed, with a mid-week reduction of 2,000 mt.

Why did the destocking speed of domestic aluminum ingots in September differ so significantly from before? SMM believes there are two main reasons:

(1) Increase in liquid aluminum proportion, decrease in casting ingot production, reduced supply pressure: The alternation of peak and off-peak seasons, combined with the resumption of production lines after maintenance, saw the proportion of liquid aluminum increase by 2.3 percentage points MoM, and slightly by 0.3 percentage points YoY to about 73.06%. According to SMM data, the production of domestic aluminum casting ingot dropped below 1 million mt in August, to approximately 993,600 mt, up 0.83% YoY but down 7.7% MoM. As the traditional peak season of September-October approaches, positive news from downstream processing sectors and slight improvement in demand may drive the operating rate of aluminum billets and other intermediates to rise again, with the liquid aluminum proportion expected to adjust to around 74% in September and the casting ingot volume likely to decrease further. Qinghai is a typical example of the recent reduction in aluminum ingot supply pressure.

(2) In the traditional "September-October" peak season, sectors like aluminum plate/sheet, strip, and foil, as well as industrial extrusion, first emerged from the off-season gloom. Partial recovery in demand boosted spot premiums and inventory consumption. In September, the warming of some downstream sectors effectively led to the early destocking in Gongyi and Wuxi. As of September 10, both East and Central China ended the discount trends and entered premium trends, with the discounts in South China also narrowing. The significant warming in the outflows from aluminum ingots from warehouses recently can be seen as indicative. According to SMM statistics, outflows from warehouses in the first week of September were 126,100 mt, an increase of 23,300 mt from the previous week, reflecting a substantial increase in downstream demand before the Mid-Autumn Festival and National Day holidays, indicating some replenishment demand.

Therefore, SMM believes that regarding domestic aluminum ingot inventories, supply-side pressure continues to ease and demand-side for aluminum plate/sheet, strip, and foil, as well as industrial extrusion, gradually emerges from the off-season gloom, supporting aluminum ingot consumption. Driven by both supply and demand, and with September's early domestic aluminum ingot destocking rate slightly exceeding expectations, the monthly inventory is expected to exhibit a significant destocking performance, providing solid support for the current aluminum price trend. Domestic aluminum ingot inventories in September are expected to hover around 700,000-800,000 mt, and in a relatively optimistic scenario, they may fall below 700,000 mt by the end of September. However, it is important to note the risk of outflow declines following a price increase and the short-term inventory accumulation risk due to concentrated arrivals during the Mid-Autumn and National Day holidays.

Regarding aluminum billet inventory, the current domestic aluminum billet inventory has maintained an overall declining trend for nearly half a year. Factors such as the dynamically controllable supply pressure of primary aluminum billet, a significant YoY reduction in remelting billet supply, and further declines in the aluminum billet inflow ratio have driven the year's high from nearly 300,000 mt at the beginning of the year down to an annual low of 110,000 mt by the end of August. Overall, aluminum billet destocking performance has been significantly better than that of aluminum ingots for most of the year. However, on the first trading day of September, there was an inventory accumulation of domestic aluminum billets, signaling possible adverse future inventory trends. Nevertheless, since entering September, the overall inventory performance of domestic aluminum billets has remained stable at low levels. According to SMM statistics, as of September 12, domestic aluminum billet social inventory was 112,400 mt, a slight decrease of 3,700 mt from last Thursday and 26,900 mt higher YoY, still slightly lower than the same period in 2022. Last week's outflows from warehouses of aluminum billets fell by 100 mt WoW to 38,500 mt, showing no warming in outflows since entering September.

Overall, aluminum billet supply-side pressure may increase as the “September peak season” approaches. According to SMM latest survey, the operating rate of leading domestic primary aluminum billet enterprises exceeded 70% for the first time in the first week of September, with an operating rate of 71.32%, flat from the end of August. However, from the demand side, demand for construction extrusions shows no signs of improvement, and businesses are quite pessimistic about the future. Supply and demand are currently mismatched, and the risk of subsequent inventory accumulation needs to be monitored. Aluminum billet inventories are expected to remain at around 100,000-150,000 mt throughout September.

In summary, SMM believes that the current performance of the aluminum billet market is still far from ideal and confidence in consumption is relatively lacking. Supply side, social inventory, and processing fees are all eagerly awaiting guidance from the “September-October peak season.” The key to breaking the current situation will be the downstream consumption performance as we enter the traditional peak season. Industrial extrusion has already provided initial support, though gaps still exist. Whether the construction materials industry can break free from its previous slump will likely determine the overall trend of the aluminum billet industry in Q4.