Three Major Factors Drive SHFE Aluminum's Unusual Strength, Aluminum Prices Maintain High Levels with Considerable Fluctuations in the Short Term [SMM Aluminum Weekly Review]

SMM January 29:

From a macro perspective, overseas, escalating US-Iran military conflicts heightened shipping risks in the Strait of Hormuz, posing threats to aluminum production and export flows in surrounding countries, thereby increasing risks in the global aluminum trade system. Early Thursday (January 29) Beijing time, the US Fed concluded its two-day monetary policy meeting, announcing it would maintain the federal funds rate target range between 3.5% and 3.75%, in line with market expectations. Resilient US economic data eased inflation concerns. Domestically, 2026 macro policies focus on expanding domestic demand, with the Ministry of Commerce's campaign to boost consumption providing support. Growth in the new energy vehicle and clean energy industry chains benefits aluminum demand, but weak real estate loan data exerted some downward pressure on aluminum prices. On January 28, the SHFE announced the addition of Xinjiang Qiya Aluminum & Power's "QY" brand and Geely Baimao Group's "Geely Baimao" brand aluminum ingots as delivery brands, involving a combined capacity of 1.3 million mt from three aluminum plants, marking a significant expansion in the aluminum futures delivery market for the year. Meanwhile, recent intensive risk control and position limit measures for precious metals such as gold and silver triggered capital outflows from the precious metals market. As a core base metal, SHFE aluminum became a key target for capital allocation, injecting crucial financial momentum into price increases.

Fundamentals, supply side, domestic and Indonesian aluminum production continued to ramp up, with daily average production steadily increasing, sustaining the supply growth trend. Expectations for production cuts at domestic alumina refineries recently increased, further boosting overall market bullish sentiment. Cost side, aluminum real-time costs were basically stable during the week. As aluminum prices hit another record high, aluminum's real-time theoretical profit surged 1,137 yuan/mt WoW to 8,745 yuan/mt. Demand side, environmental protection-driven production restrictions in central China showed renewed fluctuations, significantly impacting production stability at downstream plate/sheet, strip and foil enterprises. Moreover, consecutive sharp rises in aluminum prices dampened downstream stockpiling enthusiasm ahead of the holiday. Some aluminum extrusion sample enterprises had already entered the Chinese New Year break cycle early, with regional operating rates pulling back significantly. This week, the domestic aluminum extrusion operating rate was 44.3%, down 5.1 percentage points WoW. Building materials operating rates continued to decline, indicating overall weak demand. Some enterprises in east and south China will gradually start holidays next week, and industry operating rates will continue their seasonal downward trend. However, for industrial extrusions, influenced by adjustments to export tax rebate policies for PV modules and batteries, orders for PV frame extrusions and battery extrusions performed well, providing some support to enterprise operating rates. Simultaneously, the decline in the proportion of liquid aluminum further amplified aluminum ingot supply pressure. In late January, the proportion of liquid aluminum at domestic aluminum enterprises fell 2.25 percentage points WoW to 72.64%, down 3 percentage points YoY from the end of December. This equates to a theoretical weekly increase in casting ingot volume of 25,000 mt, with a full-month estimated increase of around 100,000 mt, up over 10% MoM. Inventory side, the inventory of aluminum ingots in major domestic consumption areas on Thursday recorded 782,000 mt, an increase of 117,000 mt from the end of December, with a growth rate of 18.5%, reaching a high level compared to the same period over the past three years.

Overall, the recent abnormal strengthening of SHFE aluminum prices is driven by three key factors: first, the escalation of US-Iran geopolitical conflicts significantly disrupted the trade of aluminum products; second, under the background of position limits in the precious metals market, there is a trend of capital flowing into the base metal sector; third, expectations for production cuts at domestic alumina refineries have risen, further boosting overall market bullish sentiment. The macro front remains strong, and the logic of a monetary easing cycle driven by expectations for US Fed interest rate cuts has not changed. Meanwhile, the short-term consecutive decline in the US dollar index continues to support non-ferrous metal prices. Supply side, domestic and Indonesian aluminum projects continue to ramp up smoothly, with daily average production steadily increasing, maintaining the trend of supply growth. Demand side performance is weak, as high aluminum prices suppress downstream enterprises' purchase willingness, leading to expectations of a decline in operating rates, and the overall spot trades are in a cold and wait-and-see pattern. Coupled with the ongoing inventory buildup, the conversion ratio of liquid aluminum continues to decrease, and the industry's supply-demand imbalance has yet to be effectively alleviated. In summary, the current SHFE aluminum price surge is event-driven and fueled by capital, with market trading sentiment in a phase of exuberance. Subsequently, one needs to be cautious about the risk of sentiment cooling and price correction due to multiple factors. SMM expects aluminum prices to maintain a considerable fluctuation at high levels in the short term, with the most-traded SHFE aluminum contract expected to operate within the range of 24,800-26,600 yuan/mt next week, and LME aluminum within the range of $3,220-3,440/mt.

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