Macro Headwinds Remain Dominant; Short-Term Aluminum Prices Need More Support [SMM Aluminum Weekly Review]

SMM July 2 News:

Macro perspective: Indirect technical talks between the US and Iran made progress; uncertainties remain around the Strait resumption and the US Fed’s policy path.

The US and Iran held indirect technical talks in Doha, Qatar, with Qatar and Pakistan serving as mediators. The discussions focused on implementing the US-Iran memorandum of understanding, covering issues such as the return of Iran’s frozen funds and ensuring maritime security in the Strait of Hormuz. Iran claimed the US violated commitments under the memorandum and said a supervisory mechanism would be established to review violations. US Vice President Vance stated that the indirect talks are progressing well and that nuclear-related discussions would begin soon. US June ADP employment increased by 98,000, the smallest gain since March and below market expectations of 118,000. At the ECB’s Central Bank Forum, Fed Chairman Walsh reiterated that forward guidance on future interest rate policy would not be provided. Walsh noted that inflation risks have diminished but that inflation remains too high. The Fed will “forge a new policy path” and hopes for thorough discussions at the July meeting. He also stressed that the Fed will maintain policy independence and continue to push ahead with balance sheet reduction.

Fundamentals: The proportion of liquid aluminum in China continued to rise; weekly aluminum ingot warehouse withdrawals hit a nearly four-year high.

Supply side, according to SMM data, China’s aluminum production in June 2026 (30 days) rose 2.2% YoY but fell 3.1% MoM. Although weak domestic demand weighed broadly across sectors, aluminum semis export demand provided effective support for domestic liquid aluminum consumption. The proportion of liquid aluminum edged up, with the share rising 0.7 percentage points MoM to 77.2%, driven mainly by improved margins in some processing segments, which led to a slight increase in liquid aluminum purchasing demand. On the inventory front, aluminum ingot destocking remained smooth this week. As of Thursday, China’s aluminum ingot social inventory fell 75,000 mt WoW to 1.13 million mt, a decline of 35,000 mt from Monday. Weaker aluminum prices lifted downstream buying sentiment, and aluminum ingot warehouse withdrawals over the past week hit a nearly four-year high, accelerating ingot destocking. In exports, the SHFE/LME price ratio continued to recover this week. As of July 2, the ratio had rebounded to 7.31, up 12.5% from the prior low of 6.5, and import losses narrowed to around 3,300 yuan/mt, more than 45% below the maximum loss of 7,604 yuan/mt. As a result, the profit margin that previously drove large-scale aluminum semis exports shrank rapidly. New orders in some segments have begun to decline, and as orders on hand are gradually fulfilled, aluminum semis exports may face reduction risks if export margins fail to recover going forward.

Overall, the indirect technical talks between the US and Iran made progress, with both sides discussing fund repatriation and strait security, and nuclear issue negotiations are about to begin. The geopolitical risk premium continued to narrow, while disputes over the management rights of the Strait of Hormuz persisted, leaving the resumption of navigation through the strait still uncertain. The hawkish shift by the US Fed boosted the US dollar index, leaving the global macro front leaning bearish and exerting downward pressure on aluminum prices. Domestically, the proportion of liquid aluminum continued to rise, and aluminum ingot warehouse withdrawals hit a four-year high over the past week. A further acceleration in the destocking pace was the biggest highlight recently, though absolute inventory levels remain in the high range.

Recently, the narrowing geopolitical risk premium, coupled with expectations of new project startups outside China, has allowed macro headwinds to dominate. LME aluminum is under considerable pressure in the short term, and SHFE aluminum is also under pressure, tracking LME aluminum in the absence of any fresh macro bullish cues. Aluminum prices are expected to remain in the doldrums. The most-traded SHFE aluminum contract is expected to trade in a range of 21,800-23,000 yuan/mt next week, with LME aluminum in a range of 2,950-3,150 $/mt. Going forward, attention should focus on: the actual production resumption pace of Middle Eastern aluminum smelters after the Strait of Hormuz fully reopens; the trajectory of the US dollar after the US Fed's hawkish signals materialize and their transmission to commodities; and whether the domestic inventory destocking continues to accelerate.

[The information provided is for reference only. This article does not constitute direct investment research advice. Clients should make prudent decisions and not rely on this as a substitute for their own independent judgment. Any decisions made by clients are unrelated to SMM.]