SMM August 15:
SMM Aluminum Billet Market: In July, the operating rate of aluminum billet rose 1.1 percentage points MoM to 58.3%, up sharply by 5.2 percentage points YoY. Benefiting from the strong performance of aluminum billet processing fees in Q2, China’s aluminum billet supply side in July continued its inertia-driven uptrend, with the operating rate hitting a year-to-date high and also standing at a high level for the same period over the past three years. As the center of aluminum prices rebounded markedly from lows in July, downstream operating performance and purchase willingness were restrained, and adjustments on the aluminum billet supply side showed a clear lag. China’s aluminum billet processing fees pulled back sharply from June highs and have now fallen below the industry’s average production cost line. Against the backdrop of most enterprises increasing output or running at full capacity for most of the month, weaker processing fees prompted a small number of aluminum billet producers to adjust production strategies and opt for early shutdowns and production cuts.
Looking ahead to August, processing fees that had been fluctuating at highs have already shown signs of weakening. The market has consistently struggled to gain matching acceptance for the Q2 operations to hold prices firm and push up processing fees, and downstream acceptance of high processing fees is limited. If processing fees stay high, some extrusion enterprises have already shifted to purchasing remelted aluminum ingot as a substitute, creating a natural ceiling for aluminum billet processing fees. In terms of supporting factors, tighter liquid aluminum supply continues to constrain the supply side, and the current situation of passive production cuts at some billet plants in south-west China is unlikely to fundamentally improve in the short term, meaning a tight supply-side structure still provides some support for processing fees. Meanwhile, both social inventory and in-factory inventory are at relatively low levels versus the same period in recent years. Under a low-inventory environment, suppliers still have some ability to hold prices firm, but risks of a subsequent inventory buildup should be watched. In terms of suppressing factors, domestic demand is weak during the traditional off-season in H2, with extrusion operating rates down MoM and limited end-user purchasing strength. Export momentum has weakened at the margin as the price spread between Chinese and overseas markets narrows; competition in processing fees is becoming increasingly intense, and moving volume at low prices has become the norm. The purchasing side generally follows the market and purchases based on price, further weakening processing fees’ resistance to declines. SMM expects China’s aluminum billet supply side to retreat from highs in August, with the operating rate expected to pull back to around 56.9%.
Data source: SMM
