Geopolitical Risk Premium Continues to Narrow, Aluminum Prices in the Doldrums [SMM Aluminum Morning Briefing]

7.2 SMM Morning Meeting Minutes

Futures: SHFE aluminum closed at 22,485 yuan/mt yesterday, unchanged. The price barely held at the MA5 (22,485) but remained well below the MA10 (23,155), MA30 (23,943.67), and MA60 (24,383.33). The bearish alignment of moving averages persisted, with the price finding temporary MA5 support after a short-term oversold decline. The MACD DIF stood at -497.88 and DEA at -356.29, forming a downward death cross. The negative histogram widened to -283.18 (previous day -268.49), indicating renewed strengthening of bearish momentum. Trading volume continued to shrink to 94,400 lots, reflecting sluggish market participation. The core SHFE aluminum trading range is suggested at 22,200-22,700. LME aluminum closed at $3,085.5/mt, down 0.23%, fluctuating intraday between $3,085 and $3,093. Prices remained well below all key moving averages (MA5=3,115.9, MA10=3,189.7, MA30=3,453.6, MA60=3,507.57), with the bearish alignment continuing to show weakness. The MACD DIF stood at -127.78 and DEA at -99.48, forming a downward death cross. The negative histogram narrowed to -56.59 (previous day -64.59), indicating that bearish momentum slightly weakened. The core LME aluminum trading range is suggested at 3,050-3,110.

Macro front: The US and Iran held indirect technical talks in Doha, Qatar, with Qatar and Pakistan serving as mediators. The talks focused on implementing the US-Iran memorandum of understanding, including the return of Iran's frozen funds and ensuring maritime security in the Strait of Hormuz. Iran claimed that the US violated the memorandum's commitments and will establish a monitoring mechanism to review violations. US Vice President Vance stated that the indirect talks are progressing smoothly and that discussions on nuclear issues will begin soon. Fed Chairman Warsh reiterated at the ECB Central Banking Forum that no forward guidance on future interest rate policy would be provided. Warsh stated that inflation risks have receded but inflation remains too high. The Fed will "chart a new policy path" and hopes for a full discussion at the July meeting. He also emphasized that the Fed will maintain policy independence and continue to push for balance sheet reduction.

Fundamentals: Supply side, according to SMM data, China's aluminum production rebounded WoW this week, mainly driven by production ramp-up at newly commissioned capacity and resumptions of idle capacity. The proportion of liquid aluminum rose 0.2 percentage points WoW last week, further reducing casting ingot volume. Outside China, high prices earlier stimulated accelerated commissioning of new projects. As new projects are energized and ramp up, operating aluminum capacity outside China is expected to rise further WoW. On the inventory front, destocking continued smoothly this week. As of Thursday, China's social inventory of aluminum ingot had destocked by 35,000 mt from Monday last week and by 75,000 mt from Thursday last week. Weaker aluminum prices lifted downstream buying sentiment, driving the destocking of aluminum ingot. On the export front, the SHFE/LME price ratio recovered quickly last week, sharply narrowing the profit margins that had driven large-scale aluminum semis exports. New orders in some segments already declined, and as orders on hand are gradually fulfilled, aluminum semis exports may face reduction risks if export margins fail to recover going forward.

Primary aluminum market: In early trading, the center of the SHFE aluminum 2606 contract ran lower than the same period of the previous trading day. Affected by low aluminum prices, some sellers still held back from selling. Downstream restocking demand was limited, and combined with bearish sentiment, market procurement sentiment remained sluggish. Mainstream transactions were made at premiums of 10 yuan/mt to 20 yuan/mt against the SHFE aluminum 07 contract. The east China market selling sentiment index was 2.83 yesterday, down 0.05 MoM; the procurement sentiment index was 2.73, down 0.04 MoM. The central China market transaction atmosphere remained sluggish yesterday. The downtrend in aluminum futures persisted, and downstream processing enterprises showed notable caution toward further declines, with only a few enterprises not signed to long-term contracts making just-in-time procurement. As aluminum prices fell sharply, suppliers' willingness to sell also stayed low, and their willingness to hold prices firm was weak. Ultimately, actual transaction prices in the central China market centered around discounts of 30-50 yuan/mt against the SHFE aluminum 07 contract. The central China market selling sentiment index was 2.86 yesterday, down 0.01 MoM; the procurement sentiment index was 2.10, down 0.02 MoM.

Aluminum scrap: SMM A00 spot aluminum closed at 22,260 yuan/mt yesterday, down 240 yuan/mt from the previous trading day, and aluminum scrap market prices broadly followed the decline. By product, bare bright aluminum wire and white scrap series fell by 200-300 yuan/mt, while aluminum tense scrap series generally dropped 100 yuan/mt. The supply side remained tight. Regulatory oversight on the reverse invoicing policy tightened, and production cuts and suspensions among small and medium-sized scrap utilization enterprises in Anhui, Jiangxi, and Hubei spread, increasing the scarcity of compliant invoiced aluminum scrap. On the import side, due to a 1–3 month shipping lag, port arrivals of aluminum scrap are expected to remain at low levels from June to August. In addition, the UAE implemented a four-month temporary ban on aluminum scrap exports starting June 3, further intensifying expectations of tighter supply of high-quality scrap in Asia. Regarding price differences, on July 1, the price difference between A00 aluminum and mixed aluminum extrusion scrap free of paint in Foshan was 1,867 yuan/mt, and the price difference between A00 aluminum and shredded aluminum tense scrap was 559 yuan/mt. Against the backdrop of scarce invoice sources and the recent rapid decline in aluminum prices, the price difference for the aluminum tense scrap series narrowed quickly, and some cast aluminum alloy enterprises have begun using aluminum ingots to replace aluminum scrap as raw material for production. This week, the aluminum scrap market is expected to continue consolidating at highs with a weak bias, but downside room is limited. The mainstream range for shredded aluminum tense scrap (priced based on aluminum content) is expected to run at 19,300–19,900 yuan/mt (tax excluded). Constraints from the reverse invoicing policy and the lagged contraction in imported aluminum scrap continue to build bottom support, but weak off-season demand and low downstream operating rates cap upside room. Subsequent attention should be paid to the pace of policy compliance, US-Iran peace talks and progress on navigation in the Strait of Hormuz, the pace of aluminum scrap arrivals from outside China, and changes in downstream operating rates in China.

Secondary Aluminum Alloy:Yesterday ADC12 market quotes continued to fall overall, with the SMM ADC12 price dropping another 100 yuan/mt from the previous day to 23,700 yuan/mt, yet the market still showed strong resilience. On the one hand, cast aluminum alloy futures and primary aluminum prices pulled back sharply, weighing on the spot market, and some enterprises accordingly lowered their quotes; on the other hand, difficulty in raw material procurement combined with tight spot inventory meant enterprises remained strongly willing to hold prices firm, with some producers choosing to stay on the sidelines or only slightly follow the decline, and their willingness to sell at low prices was low. Overall, under the dual influence of weakening futures and cost support, ADC12 prices continued to move sideways, with spot price resilience remaining prominent. Recently, A00 primary aluminum prices declined rapidly, while aluminum scrap prices held relatively firm due to tight supply of compliant cargoes and traders holding back from selling, resulting in the ADC12 secondary aluminum alloy ingot price rising to over 1,000 yuan/mt above A00, and thus the logic of A00 replacing aluminum scrap has drawn market attention. According to the survey, some enterprises have already started or are considering replacing some aluminum scrap with A00, mainly to secure raw material supply, ease tax invoice constraints, and reduce the difficulty of procuring aluminum scrap. However, for ADC12 production, using A00 to replace aluminum scrap still requires additional addition of copper and other alloying elements, and entails bearing the costs of burning loss, energy consumption, and processing fees during the remelting process, so the actual economic advantage of A00 has narrowed significantly compared with theoretical calculations. In addition, against the backdrop of persistently weak end-use demand, some enterprises are actively controlling the pace of taking orders and reducing production, rather than expanding production through replacement with A00. Therefore, at the current stage, A00 replacement is reflected more as a phased adjustment of increasing the addition ratio and optimizing the ingredient structure, and is not enough to form a trend of large-scale, complete replacement of aluminum scrap. Subsequent focus should remain on the recovery of aluminum scrap supply, changes in tax invoice costs, and the further evolution of the price spread between A00 and aluminum scrap.

Aluminum Market Summary:US-Iran indirect technical talks made progress, with the two sides discussing the return of funds and strait security, nuclear issue consultations about to begin, the geopolitical risk premium continuing to converge, the dispute over management rights of the Strait of Hormuz persisting, and the resumption of navigation through the strait remaining uncertain. The US Fed’s hawkish pivot boosted the US dollar index, and nonferrous metal prices came under pressure. Under macro headwinds, aluminum prices in and outside China fell. In the short term, bearish factors dominate, and aluminum prices are expected to remain in the doldrums.

[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 this as a substitute for independent judgment. Any decision made by the client is not related to SMM.]