After destocking surpassed the 600,000 mt mark, how will domestic aluminum inventory evolve subsequently?[SMM Analysis]

In May, China's domestic aluminum ingot inventory successfully surpassed the 600,000 mt mark, demonstrating strong resilience in domestic aluminum consumption during the critical transition phase between the off-season and peak season, providing crucial support for the recent consecutive upward trend in aluminum prices. According to SMM statistics, as of May 15, the inventory of aluminum ingots at major domestic consumption hubs stood at 581,000 mt, down 20,000 mt from Monday this week, down 39,000 mt from Thursday last week, and down 166,000 mt YoY, remaining at a low level compared to the same period in the past three years.

However, it is noteworthy that aluminum prices continued to rebound and rise in mid-May, with prices breaking through the 20,000 yuan/mt threshold, which has somewhat suppressed downstream restocking demand. There have been noticeable signs of a decline in domestic outflows from warehouses over the past week, which may gradually return to off-season levels. Regionally, the weak performance of spot aluminum ingots in South China persisted during the week. As aluminum prices continued to rise, suppliers increased their selling efforts, resulting in relatively abundant supply compared to the other two regions. Relatively high-priced cargoes received little attention, and discounts showed signs of widening. According to an SMM survey, a certain aluminum smelter in southwest China recently reduced its casting ingot volume on a WoW basis to increase the proportion of casting ingots, considering inter-regional price spreads. Additionally, with the price advantage in spot markets in southwest China, including Chongqing, some cargoes were diverted, limiting the arrival pressure in South China in the short term. However, as another aluminum smelter begins capacity replacement, primarily focusing on casting ingots, arrivals are expected to increase in the coming period. Due to continuous destocking and relatively low short-term arrivals based on in-transit volumes, spot premiums/discounts in east China have risen significantly recently, with the Shanghai-Guangdong price spread exceeding 100 yuan/mt. Meanwhile, premiums/discounts in Gongyi have also remained relatively strong recently. However, due to increased shipments from a certain aluminum smelter in north-west China, Gongyi may face some inventory pressure in late May. Coupled with significant profit growth for suppliers in the short term, most suppliers are cashing in, leading to a price collapse in premiums/discounts. Overall, from the perspective of price spreads, despite rapid destocking in both regions recently, there is an expectation of a notable increase in arrivals in east China and Gongyi by month-end, and the destocking speed may slow down.

SMM expects that despite the relatively low overall arrival volumes of aluminum ingots in China during the mid-to-late May period, which will temporarily sustain the destocking trend of domestic aluminum ingot inventory in the short term, with the recent low point likely hovering around 550,000 mt, under normal circumstances, due to the overall smooth domestic transportation in May, coupled with the expected weakening of outflows from warehouses during the off-season, the circulation of aluminum ingots in major domestic consumption areas is likely to gradually ease from late May to early June. SMM anticipates that domestic aluminum ingot inventory will likely remain within the range of 550,000-600,000 mt by the end of May. However, close observation is still required regarding the positive or negative impacts of macro factors, such as the progress of Sino-US tariff negotiations, on downstream consumption and outflow performance, in order to confirm the critical period for the subsequent transition of domestic aluminum ingot inventory from destocking to buildup.

In terms of aluminum billet inventory, according to SMM statistics, the domestic aluminum billet inventory at major consumption areas stood at 1.382 million mt on May 15, down 14,500 mt from Monday and 55,000 mt YoY, remaining at a low level compared to the same period in the past three years. After falling below 1.5 million mt, aluminum billet inventory continued to exert downward pressure, approaching the 1 million mt inventory threshold. From the perspective of outflows from warehouses, domestic aluminum billet outflows totaled 46,600 mt during the period from May 7 to May 11, up 4,000 mt from the previous period but down 9,100 mt YoY. The performance of aluminum billet inventory outflows improved after the holiday, but still fell short of last year's levels, indicating that the current market's warehoused goods transactions are performing moderately, with an increased proportion of truck-transported goods in the market, resulting in fewer arrivals at warehouses and a continuous decline in inventory. Current consumption still shows resilience, with high processing fees but optimistic order performance at billet mills. Additionally, the easing of Sino-US relations has, to a certain extent, stimulated end-use consumption, further driving down inventory. Against the backdrop of better-than-expected demand in off-season, aluminum billet producers, which produce based on sales, maintain low in-plant inventory levels, with truck-transported goods dominating the market. Coupled with the recent substitution effect of aluminum rods, the supply of aluminum billets has tightened, leading to continuous destocking of aluminum billet inventory. SMM expects that there will be further downside room for aluminum billet inventory in mid-to-late May, and it will still be necessary to closely monitor consumption and arrivals in the subsequent period.

On the demand side of aluminum billets, the national operating rate for extrusions declined slightly by 1 percentage point WoW to 56.5% in the past week. By sector, benefiting from the incremental financial policy support from the People's Bank of China and the National Financial Regulatory Administration for the real estate market, the industry's trend of halting declines and stabilizing has been further consolidated. Infrastructure orders for leading building materials enterprises in Shandong and central China regions continued to warm up, supporting a slight increase in the operating rate for building materials. In terms of raw material procurement, despite the fluctuating aluminum prices, enterprises' willingness to stockpile has not significantly weakened. The industrial materials sector showed divergence, with leading enterprises in the PV border sector experiencing only a slight pullback in operating rates, still scheduling production according to order rhythms. However, some outsourcing enterprises in east China and Henan regions reported a sharp decline in PV orders, with operating rates maintained only in the 40%-50% range. Notably, a newly established home appliance extrusion enterprise in east China stated that its capacity is still in the ramp-up stage, with current orders not yet affected by tariff policies and no concentrated rush for export observed. Some leading automotive extrusion enterprises in east China reported stable operating rates this week, with insufficient momentum for new orders. Some enterprises have shown a significant increase in sensitivity to aluminum price fluctuations, indicating a need to reduce costs from the source to maintain survival. In terms of exports, a large industrial materials enterprise in east China reported that its export orders remained stable, mainly because the export of large components such as high-speed rail, aircraft, and automobiles was limitedly affected by short-term tariff fluctuations. SMM will continue to follow up on the actual execution of orders in various sectors.