Aluminum prices rose initially on policy incentives, but then pulled back due to weak fundamentals

During the week, major bullish news from the macro front pushed aluminium prices higher. Various regions in China introduced policies to lower down payments and cancel the lower limit on mortgage rates, optimizing the real estate sector. On May 29, the State Council issued the "2024-2025 Energy Conservation and Carbon Reduction Action Plan," which requires strict implementation of aluminum capacity replacement. By the end of 2025, the aluminum alloying ratio should increase to over 90%. New and expansion aluminium projects must meet benchmark energy efficiency levels and achieve A-level environmental protection performance. This has driven aluminium prices to high levels. Overseas, the US Fed's hawkish stance resurfaced during the week, but a European Central Bank official said that the ECB should not exclude the possibility of a second rate cut in July. The escalating Israel-Palestine conflict also boosted aluminium prices.

On the fundamentals, the domestic aluminium industry saw stable operating rates. The resumption of electrolytic cells in Yunnan is nearing completion, with delays in some areas due to technical upgrades, resulting in a slower pace. The total domestic operating capacity is around 42.91 million mt. Spot alumina prices continued to rise in the week, leading to an increase in domestic aluminium costs. As of May 30, SMM estimated the real-time cost of domestic aluminium at 18,006 yuan/mt, up 180 yuan/mt WoW. Domestic spot prices fluctuated at high levels, with real-time profits for domestic aluminium at 3,704 yuan/mt, up 780 yuan/mt WoW. The domestic aluminium import window remained closed during the week, with significant losses on imported aluminum ingots. There were few quotes in bonded areas, and the Yangshan aluminium premium stabilized. The Q3 port premium in Japan may rise to $175/mt, further reducing the likelihood of overseas aluminium ingots entering the domestic market. Recently, some Rusal shipments arrived in areas like Gongyi, mainly consisting of long-term orders. Last week, domestic downstream aluminium operating rates remained weak. High aluminium prices inhibited end-user orders, resulting in fewer new orders for aluminium processing enterprises and significantly reduced production cycles. Some enterprises have high finished product inventories and lack the willingness to increase production. Domestic primary processed products like aluminium billets faced sluggish sales, with processing fees dropping significantly. The production of ingots increased WoW, while aluminum ingots continuing to trade at a significant discount, and destocking remained slow.

From a technical perspective, the model predicts that the price range of SMM A00 aluminum average price will be [20,715, 21,700], the price center will be 21,180, the unit is yuan/mt, the extreme price range will be [20,340, 22,170], the normal price range will be [20,590, 21,860], and the conservative price range will be [20,840, 21,540]. The price is expected to move sideways or go down. The support range will be [20,590, 20,840], and the resistance range will be [21,540, 21,860]. The model predicts that the price range of the most-traded SHFE aluminum contract will be [21,000, 21,905], with the price center of 21,430, and the unit is yuan/mt. The extreme price range will be [20,550, 22,270], the normal price range will be [20,850, 22,030], and the conservative price range will be [21,150, 21,780]. The price is expected to move sideways. The support range will be [20,850, 21,150], and the resistance range will be [21,780, 22,030].

Overall, from a macro perspective, the IMF raised its forecast for China's economic growth this year, and the State Council issued an "Action Plan" to guide the optimization of capacity in the aluminum industry, aiming for high-quality development. Multiple favorable factors boosted aluminum prices. The market is concerned that capacities failing to meet the energy consumption standards by 2025 will be required to undergo technological upgrades or exit the market. However, in recent years, domestic aluminum plants have been undergoing intensive maintenance and technological upgrades, and most capacities can meet the industry's energy consumption standards. This plan may further promote rapid optimization and technological upgrades in the industry, but the likelihood of voluntary exit under high profits is low. On the fundamentals, the operating capacity of domestic aluminium continued to rise during the week, with good progress in the resumption of production in Yunnan, which may be completed in June. Supply pressure may gradually emerge, with social inventory continuously accumulating. High aluminum prices inhibited inventory consumption, while LME aluminum inventory slightly retreated from its peak. From the demand, recent aluminum prices hit a record high for the year and have been highly volatile, inhibiting downstream procurement enthusiasm, leading to a decline in orders and operating rates. As the market transitions between peak and off-peak seasons, many downstream sectors have seen a slight decline in orders, and the overall operating rate is expected to weaken. In the week, spot alumina prices continued to rise, and the cost of domestic aluminum continued to climb, with the import window remaining closed, which may provide some support for aluminum prices. SMM expects aluminum prices to fluctuate at a high level. We need to pay attention to the risk of price volatility after aluminum prices hit new highs. SMM predicts that most-traded SHFE aluminum will fluctuate at 20,850-21,780 yuan/mt this week, and LME aluminum may fluctuate at $2,650-2,800/mt. We will pay attention to changes in overseas macro sentiment and domestic downstream operating rates.