Macro and Fundamentals Intertwined with Bullish and Bearish Forces, Short-term Aluminum Prices Expected to Mainly Consolidate and Adjust [SMM Aluminum Weekly Review]

SMM, July 16:

Macro perspective:

US June CPI fell 0.4% MoM, the first month-on-month contraction since 2020, prompting the market to lower its expectations for US Fed interest rate hikes. However, Fed Chairman Warsh bluntly expressed "zero tolerance" for the persistent five-year high inflation, displaying a tough hawkish stance. According to CME data, the probability of a rate hike was 53.5% in September, rising to 61.8% in October and further to 74% in December. The pressure on the valuation of the nonferrous metals sector from rate hike expectations has never fully dissipated. Elsewhere, renewed conflict in the Middle East and the less-than-expected progress in US-Iran negotiations have intermittently roiled futures with geopolitical risk premiums.

Fundamentals side:

Supply side, this week, the proportion of liquid aluminum in China's aluminum industry rose 0.37 percentage points WoW, mainly driven by strong aluminum billet processing fees, which increased the share of direct liquid aluminum supply and further reduced aluminum ingot casting. Outside China, with the ongoing ramp-up of new projects and production resumptions, aluminum supply is expected to continue rising. Overall, however, the global aluminum ingot destocking trend is unlikely to reverse in the short term.

Demand side, the downstream processing industry is in the traditional consumption off-season, with divergent sector performance but mostly under pressure. The operating rate of aluminum downstream processing industry leaders registered 61.3%, down 0.6 percentage points MoM. The SHFE/LME aluminum price ratio repaired, squeezing downstream export profits. As orders on hand are being digested, exports' support for demand is expected to weaken.

Inventory side, this week, China's aluminum social inventory continued its destocking trend. As of Thursday, aluminum ingot social inventory in China fell by 54,000 mt from the previous Thursday and by 23,000 mt from this Monday. This week, aluminum prices mainly consolidated in a narrow range, downstream demand was weak, buying sentiment was somewhat cautious, and warehouse withdrawals slowed.

In summary, the Middle East situation remains volatile, concerns over rate hikes persist, supply is continuing to recover, but the destocking pattern is difficult to reverse in the near term. Amid the tug-of-war between longs and shorts, aluminum prices are expected to consolidate in the near term. The most-traded SHFE aluminum contract is expected to trade in a range of 22,500–23,500 yuan/mt next week, while LME aluminum is expected to trade in a range of $3,050–$3,250/mt. Going forward, close attention should be paid to the production resumption progress in the Middle East and the trajectory of geopolitical conflicts, LME aluminum ingot inventory changes, as well as downstream processing orders and aluminum semis export data in China.

[The information provided is for reference only. This article does not constitute direct investment research advice. Clients should exercise prudence in decision-making and not use this as a substitute for independent judgment. Any decisions made by clients are unrelated to SMM.]