Central China Aluminum Premiums Rise and Stabilize on Trader Hedging and Downstream Dip Buying

This week, the overall trading atmosphere in the central China spot aluminum market stayed high. The core tension centered on the tug of war between traders' hedging purchases and downstream processing enterprises' weak purchase willingness, with the premiums trend driven more by the trader side than by end-use demand boost.

This week, hedging sentiment among traders was strong, becoming the core force pushing premiums higher. At the beginning of the week, trading firms engaging in both spot and futures market bought large volumes when premiums were low, driving market quotes gradually higher. In the following days, with ample premium space, traders continued to push premiums higher to profit from the price spread, maintaining strong purchasing enthusiasm throughout. Meanwhile, suppliers showed a notable willingness to hold prices firm when selling, and with traders' active purchasing, this further pushed the center of premiums higher. By mid-week, premiums once climbed to the high range of the week. Thereafter, as premiums continued to rise, traders' profit margins narrowed, hedging sentiment cooled slightly, and procurement volumes scaled back. Notably, however, just as the heat on the trader side cooled, downstream processing enterprises' willingness to buy on dips began to strengthen. Actual transaction prices did not weaken due to the cooler trader activity but instead firmed up, providing effective support for premiums. Overall, premiums moved in a "rise then stabilize" pattern this week, with the center rising markedly WoW. Supported by improved downstream purchasing, the pullback in premiums was limited.

In the first half of the week, downstream processing enterprises were sluggish overall. July's traditional consumption off-season, combined with persistent high temperatures, kept downstream processing enterprises in central China operating at low rates, and the issue of insufficient end-user orders remained unimproved. At the start of the week, although traders actively bid up prices and drove quotes higher, downstream buying sentiment was subdued, and actual transactions did not follow the upward movement in quotes. Downstream's wait-and-see attitude and resistance effectively capped the upside room for actual transaction prices, thus restraining the rise in premiums early in the week. However, as absolute prices pulled back slightly mid-week, downstream's fear of high prices eased somewhat. Some processing enterprises began to restock on dips, with buying sentiment improving slightly from earlier. The shift in downstream procurement strategy from previously chasing rallies to now buying on dips is worth noting and may foreshadow a pickup in market trading activity going forward. On the inventory front, the destocking pace of aluminum ingot inventory in Gongyi has been persistently slow this week. Earlier, the Yu-Shanghai price spread was relatively small, leaving insufficient arbitrage space for cargo flows. This led to a significant amount of aluminum ingots from other regions being transferred to Gongyi, offsetting part of the consumption destocking effect and leaving the destocking magnitude in Gongyi consistently unsatisfactory. As of July 16, Gongyi’s inventory stood at about 235,000 mt, down only about 8,000 mt from the same period last week, with the destocking pace notably weaker than market expectations.

Looking ahead to next week, the discount in the central China spot aluminum market is expected to consolidate and narrow. The tug-of-war between traders’ hedging sentiment and downstream dip-buying purchase willingness will dictate the discount trend. If downstream restocking demand is released in a concentrated manner, the downside room for the discount will be significantly limited; conversely, if traders’ hedging sentiment heats up again, the discount may still test high levels once more.