Macro Policies Remain Positive, Aluminum Prices Hit New Highs During the Week, Fundamental Negative Feedback Suppresses Post-Holiday Upside Momentum [SMM Aluminum Weekly Review]

SMM December 31:

From a macro perspective, domestic policies remained proactive. The domestic fiscal work conference held in Beijing clarified that a more proactive fiscal policy will continue in 2026, aiming to expand expenditure, boost domestic demand and consumption, with a focus on areas such as new quality productive forces. The State Administration for Market Regulation outlined key tasks for 2026, emphasizing the need to deepen fair competition governance, intensify efforts to break down administrative monopolies, strengthen anti-monopoly and anti-unfair competition enforcement, and thoroughly address "involution-style" competition. The 2026 national subsidy plan was officially released; the National Development and Reform Commission (NDRC) and the Ministry of Finance issued the "Notice on Implementing Large-Scale Equipment Updates and the Consumer Goods Trade-in Policy in 2026," along with allocating the first batch of 62.5 billion yuan in funds to support the trade-in of consumer goods. Overseas, expectations for interest rate cuts remained neutral during the week. The minutes from the US Fed's December meeting showed that the FOMC agreed to cut rates at the December meeting, but officials were deeply divided. Some participants indicated that, based on their economic outlook, after lowering the target range at this meeting, it might be appropriate to maintain the target range unchanged for some time. The minutes also showed that if inflation declines gradually as expected, most officials viewed further rate cuts as appropriate.

On the fundamentals side, on the supply side, new aluminum projects in China and Indonesia continued to ramp up, with daily average production increasing further. Additionally, a new aluminum project in Inner Mongolia announced a successful power-on on December 20. In the near future, the daily average production of aluminum is expected to continue growing. Demand side, high prices suppressed downstream demand for cargo pick-up. The operating rate of leading domestic aluminum downstream processing enterprises fell 1 percentage point WoW to 59.9%. Coupled with intensified environmental protection-related controls in central China, some local aluminum processing enterprises had completely halted production. Spot demand continued to shrink accordingly, with production expected to gradually resume after the New Year holiday. The overall operating rate for downstream enterprises trended downward during the month, and the proportion of liquid aluminum also declined, dropping 0.8 percentage points MoM to 76.5%, a decrease larger than anticipated at the beginning of the month. Based on SMM's proportion of liquid aluminum data, domestic aluminum ingot casting volume in December decreased 13.4% YoY but increased 7.7% MoM. Inventory side, according to SMM statistics, inventory of aluminum ingots in mainstream domestic consumption areas recorded 660,000 mt this Wednesday, an increase of 15,000 mt from this Monday. Given that high aluminum prices are suppressing warehouse withdrawals, shipments from north-west China are smooth, and ingot casting volume is expected to continue increasing before the Chinese New Year, SMM forecasts that inventory will rise to around 730,000 mt by the end of January 2026 and overall show an inventory buildup trend in Q1.

Overall, recent positive macro signals continued to be released. The domestic fiscal work conference clarified that 2026 will see expanded expenditure and boosted consumption, focusing on areas like new quality productive forces. Moreover, the implementation of the 2026 national subsidy plan and the allocation of funds, aimed at stimulating the trade-in of consumer goods, are expected to boost downstream aluminum demand in the medium and long term, forming a policy floor expectation. Fundamentally, the tariff adjustments during the week did not bring additional shocks, but supply-side pressures gradually intensified, while demand was constrained by high prices and environmental protection-driven production restrictions. The proportion of liquid aluminum declined significantly, and operating rates in downstream sectors such as extrusions remained weak, with spot consumption showing signs of fatigue. Overall, strong macro policy expectations have undoubtedly become a hot topic in the aluminum market recently and have built a bottom support for aluminum prices. However, the reality of suppressed fundamental consumption and continuously increasing inventory will significantly curb the momentum for further price increases. In the short term, aluminum prices are expected to fluctuate at highs with obvious resistance above. The most-traded SHFE aluminum contract is forecast to trade between 22,300-23,200 yuan/mt next week, while LME aluminum is expected to move in the range of $2,920-3,020/mt.

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