Interest Rate Cut Expectations Heat Up, Boosting Aluminum Market, While Fundamentals Constrain Upside Potential [SMM Aluminum Morning Meeting Minutes]

12.19 SMM Morning Meeting Minutes

Futures: During the night session on December 18, the most-traded SHFE aluminum 2602 contract opened at 21,965 yuan/mt, hit a high of 22,035 yuan/mt, touched a low of 21,910 yuan/mt, and finally closed at 22,030 yuan/mt, up 75 yuan/mt, or 0.34%, from the previous close. From a technical perspective, the MA moving averages showed a divergent arrangement (MA5: 21,958.00 > MA10: 21,936.50 < MA20: 22,016.25 > MA40: 21,866), while the MACD 4-hour candlestick level continued to show a green bar (DIFF: 24.90, DEA: 37.07). In terms of open interest, the night session open interest was about 299,000 lots, an increase of 4,556 lots from the daytime session. LME aluminum opened at $2,896/mt, reached a high of $2,918/mt, touched a low of $2,887.5/mt, and finally closed at $2,917/mt, up 0.38% from the previous day. Trading volume was 16,900 lots, up 163 lots, and open interest was 674,000 lots, up 4,126 lots.

Macro Front: Luo Wen, Secretary of the Party Leadership Group and Director of the State Administration for Market Regulation, presided over an enlarged meeting of the Party Leadership Group to convey and study the spirit of the Central Economic Work Conference and to research and deploy implementation measures. The meeting called for intensified efforts to advance the construction of a unified national market, strengthen fair competition governance, and promote smooth economic circulation. It also required comprehensive rectification of "involution-style" competition to foster a market order characterized by high quality and price, as well as benign competition. Efforts should continue to optimize the business environment, vigorously stimulate the vitality of various market entities, and enhance endogenous market momentum. (Bullish★) Data released by the US Department of Labor on the 18th showed that the US Consumer Price Index (CPI) in November increased 2.7% YoY, lower than the 3% in September; October inflation data was not released due to the US federal government "shutdown." (Bullish★) The Bank of England's nine-member Monetary Policy Committee (MPC) voted 5-4 on Thursday to cut the benchmark interest rate by 25 basis points to 3.75%, marking the fourth rate cut this year. Among them, Bank of England Governor Bailey played a "decisive vote" role; he had voted to keep rates unchanged in November but sided with the rate-cut camp this time. (Bullish★)

Fundamentals: On the supply side, new aluminum capacity in China and Indonesia was steadily released, and operating production increased slightly, leading to a weekly production increase. On the demand side, it was the traditional consumption off-season in December, and the operating rates of downstream aluminum wire and cable and aluminum extrusion sectors both declined to varying degrees this week. Affected by weakening demand, the SMM weekly proportion of liquid aluminum recorded 76.3% this week, down 0.24 percentage points WoW.

Primary Aluminum Market: In the early session, the SHFE aluminum 2601 contract fluctuated downward, but its trading center moved up compared with the previous trading day. Traders sold goods at year-end to recover funds, offering cargo at discounts. The spot market had ample supply, with quotations at discounts of 50 to 10 yuan/mt against the SMM average price, among which discounts of 30 yuan/mt against the SMM average were more concentrated. Demand weakened in the off-season, and downstream made just-in-time procurement, with actual transaction prices mostly concentrated around discounts of 30 yuan/mt. On Thursday, the selling sentiment index in the east China market was 2.46, down 0.17 WoW; the purchasing sentiment index was 2.41, down 0.1 WoW. SMM A00 aluminum was quoted at 21,730 yuan/mt, down 20 yuan/mt from the previous trading day, at a discount of 140 yuan/mt against the 2601 contract, down 30 yuan/mt from the previous trading day. On Thursday, transactions in the central China market remained predominantly sluggish. Downstream processing enterprises maintained weak purchase willingness, and there were few trader buyers in the market. With a large number of suppliers selling, transaction prices in central China fell sharply and consistently hovered at low levels. Final actual transaction prices ranged from discounts of 10 yuan to 50 yuan against the central China price, with low trading volume. On Thursday, the selling sentiment index in the central China market was 2.79, up 0.05 WoW; the purchasing sentiment index was 2.67, down 0.02 WoW. SMM central China price closed at 21,620 yuan/mt, down 50 yuan/mt from the previous trading day, at a discount of 250 yuan/mt against the 2601 contract, down 60 yuan/mt from the previous trading day. The price difference between Henan and Shanghai was -110 yuan/mt, down 30 yuan/mt from the previous trading day.

Recycled aluminum raw materials:On Thursday, spot primary aluminum prices edged down compared to the previous trading day, with SMM A00 spot closing at 21,730 yuan/mt. The aluminum scrap market was largely stable overall. Some scrap utilization enterprises reported high inventories of wrought aluminum alloy scrap collected during the peak season, lacking sufficient orders on hand to hedge raw material inventories, thus temporarily slowing the procurement pace for related scrap. Additionally, environmental protection-driven production restrictions in Chongqing affected the operating rates of alloy enterprises, leading to a slight weakening in downstream demand for aluminum scrap. Imported aluminum scrap market faced tight raw materials, and traders mostly maintained low inventory levels. However, a mid-week narrow correction in aluminum prices led to a decline in aluminum scrap prices. Some aluminum scrap suppliers held prices firm and were reluctant to sell, while downstream alloy enterprises also faced tight supply of recycled aluminum raw materials. On Thursday, baled UBC aluminum scrap was mainly quoted at 16,250-16,750 yuan/mt (ex-tax), and shredded aluminum tense scrap (priced based on aluminum content) was mainly quoted at 18,000-18,550 yuan/mt (ex-tax). Prices for baled UBC, clean tapping aluminum wire, mixed aluminum extrusion scrap free of paint, mechanical casting aluminum scrap, scrap motorcycle wheel, and mixed aluminum tense scrap were stable or slightly raised by 25-50 yuan/mt WoW. Regarding the price difference between A00 aluminum and aluminum scrap, on December 18, the price difference between A00 aluminum and shredded aluminum tense scrap closed at 1,924 yuan/mt, and the price difference between A00 aluminum and bare bright aluminum wire in Jiangsu was 901.9 yuan/mt. The aluminum scrap market is expected to hover at highs this week, with the mainstream range for shredded aluminum tense scrap (priced based on aluminum content) at 18,200-18,900 yuan/mt (ex-tax). The tight supply situation remains difficult to change, with constraints on imports and recycling persisting, providing a floor for prices. Demand side, the year-end push for annual targets in the secondary aluminum sector and the dampening effect of high prices are intertwined, causing scrap utilization enterprises in extrusion and rolling sectors to be cautious about purchasing due to high prices. Primary aluminum price trends serve as the core guidance, coupled with the impact of environmental protection-driven production restrictions and transportation constraints in central China, leading to cautious market sentiment. Overall, the tug-of-war between sellers and buyers continues, requiring close monitoring of primary aluminum fluctuations, environmental protection policies, and downstream procurement pace, while remaining vigilant about the risk of a correction from highs.

Secondary Aluminum Alloy:Futures side, on Thursday this week, the most-traded cast aluminum alloy contract 2602 opened at the day's high of 21,170 yuan/mt. During the day, futures fluctuated downward, hitting a bottom of 21,005 yuan/mt, and finally closed at 21,110 yuan/mt, down 60 yuan/mt or 0.28% from the previous trading day. The futures market was primarily characterized by long position reduction. In the spot market on Thursday this week, the SMM A00 aluminum price experienced a slight correction of 20 yuan/mt to 21,730 yuan/mt, while the ADC12 price held steady at 21,650 yuan/mt. With aluminum prices fluctuating rangebound, quotations in the secondary aluminum market were generally stable. Currently, raw material supply is tight, and aluminum scrap traders have a strong willingness to hold prices firm, providing support for secondary aluminum costs. However, aluminum price fluctuations have intensified downstream wait-and-see sentiment, with demand marginally weakening, resulting in sluggish market transactions. Overall, cost support underpins a solid price floor, but slowing demand and fluctuating aluminum prices jointly suppress purchase willingness. ADC12 prices are expected to hover at highs in the short term.

Aluminum Market Summary:Macro perspective, US November non-farm payrolls data indicated continued weakness in the job market, leaving room for interest rate cuts next year; coupled with dovish signals from US Fed officials, which further strengthened expectations for US rate cuts, boosting macro sentiment. In terms of supply, the industry maintained high profitability, alongside the steady release of new capacity, leading to a slight increase in aluminum supply. Demand side, although December is the traditional consumption off-season, consumption in sectors like automotive, power, and electronics showed strong resilience without significant seasonal weakness; although the proportion of liquid aluminum direct supply declined, it remained high. Inventory side, although SMM aluminum ingot inventory shifted to destocking within the week, after the improvement in Xinjiang aluminum ingot shipment efficiency, previously accumulated social inventory accelerated inflows; coupled with overall off-season demand still being weaker than supply increments, SMM social inventory for aluminum ingots is expected to show an inventory buildup trend next week. Cost side, alumina prices continued to decline, while auxiliary material prices were mostly stable, leading to a continuous decrease in the marginal production cost for aluminum, significantly weakening the supportive effect of costs on aluminum prices. Overall, the domestic fundamentals currently lack strong support for sustained aluminum price increases, but overseas production reduction risks and improved macro sentiment provide some support. SMM expects aluminum prices to maintain a fluctuating trend at highs in the short term.

[The information provided is for reference only. This article does not constitute direct advice for investment research decisions. Clients should make decisions cautiously and not use it to replace their own independent judgment. Any decisions made by clients are unrelated to SMM.]