Expectations for US Fed Interest Rate Hikes Game Persists, China’s Accelerating Destocking Signals Short-Term Stabilization [SMM Aluminum Weekly Review]

SMM, June 11 –

Macro Perspective: US-Iran ceasefire agreement teeters; tug-of-war over US Fed rate hike expectations persists

Outside China, the US-Iran ceasefire agreement is on the verge of collapse, as President Trump threatened a "very severe" strike on Iran due to slow progress in negotiations to end the conflict and did not rule out attacking Iran’s infrastructure. US Secretary of Defense Hegseth said key Iranian facilities would be bombed, while Iran’s armed forces vowed to respond "harsher, stronger, and more devastating than ever." US May nonfarm payrolls increased by a stronger-than-expected 172,000, with job gains for March and April revised up by a combined 93,000. Markets fully priced in a 25-basis-point rate hike by the US Fed before year-end. The US May CPI rose 0.5% MoM and climbed to 4.2% YoY, a three-year high, but the in-line CPI data still moderated market expectations for US Fed rate hikes. Meanwhile, Trump stated that it would be a wrong choice for the Fed to raise rates and that he hopes to see lower rates. China side, the consumer price index rose 1.2% YoY in May, with overall inflation remaining mild and manageable.

Fundamentals side, China’s aluminum ingot destocking pace has notably accelerated, though downstream processing sectors remained broadly weak during the off-season

Supply side, according to SMM data, China’s aluminum output edged down slightly this week, and the proportion of liquid aluminum rose slightly by 0.16 percentage points WoW. Downstream demand for liquid aluminum was moderate, with the key focus remaining on aluminum semis exports. Inventory side, as of Thursday this week, China’s aluminum ingot social inventory destocked by 63,000 mt WoW and by 48,000 mt from Monday, with the destocking pace significantly accelerating. However, due to demand substitutability between aluminum ingot and billet, destocking of China’s aluminum billet social inventory slowed this week. Demand side, downstream processing sectors in the consumption off-season performed weakly overall. Although strong export demand in some sectors provided a partial offset, weekly operating rates for aluminum plate/sheet & strip, aluminum foil, and aluminum wire and cable weakened, and downward pressure on the aluminum extrusion sector intensified. Overall, the weekly operating rate of downstream leaders dropped another 0.4 percentage points WoW this week.

Overall: Macro front, Trump threatened a "very severe" strike on Iran’s infrastructure, and Iran responded forcefully, but the market has become desensitized to multiple similar statements, with the geopolitical risk premium weakening at the margin. The US May CPI rose to 4.2% YoY, hitting a three-year high, with core CPI strengthening in tandem. The tug-of-war over US Fed rate hike expectations this year persisted, and expectations of liquidity tightening exerted some pressure on metal prices. Fundamentals side, the supply deficit outside China is expected to provide relatively firm bottom support for aluminum prices, while expectations of rising energy costs are acting as a bullish driver. China’s aluminum ingot social inventory destocked at a notably faster pace as of Thursday this week, effectively easing earlier high inventory pressure and delivering a short-term stabilization signal. However, the relatively high inventory pressure in China remains pronounced, which is expected to cap the upside room for domestic aluminum prices. The most-traded SHFE aluminum contract is expected to trade in the range of 23,600-24,600 yuan/mt next week, while LME aluminum is expected to trade in the range of $3,400-3,600/mt.