Aluminum prices are declining. Whether this can effectively lead to destocking? [SMM Analysis]

On July 22, 2024, SMM reported that the total social inventory of aluminum ingots was 792,000 mt, (the amount for sale stood at 666,000 mt), down 5,000 mt from last Thursday but still 247,000 mt higher YoY. Pick-up from warehouses increased by 11,100 mt WoW to 124,700 mt last week. SMM believes that the significant drop in aluminum prices has stimulated the pick-up of aluminum ingots. Last week, spot aluminum prices fell below the 20,000 yuan/mt and continued to decline, dropping below the 19,500 yuan/mt this week. As of this Monday, SMM A00 aluminum prices were reported at 19,430 yuan/mt, down 610 yuan/mt from last Monday. It is worthy of attention that the significant adjustment in aluminum prices did not strengthen the spot premiums/discounts of aluminum ingots in east China, with the discount widening to 70 yuan/mt. What is the reason for this?

SMM believes that despite a slight destocking of domestic aluminum ingot inventory after the weekend, the current inventory remains at a high level for the same period in nearly three years. The social inventory of aluminum ingots is approaching the 800,000 mt, which is relatively high and continues to suppress the performance of both futures and spot aluminum. By region, Wuxi's aluminum ingot inventory continued to accumulate, breaking the 300,000 mt. This is due to the still large shipments from northern aluminum smelters, resulting in concentrated arrivals in Wuxi this weekend, while pick-up from warehouses decreased by 3,600 mt WoW, making it the only region with a decline in pick-up from warehouses from a week ago. In Gongyi, both supply and demand have recently increased, with pick-up from warehouses up 8,200 mt WoW last week, but arrivals also maintained an increasing trend, keeping inventory flat from last Thursday. Foshan has been in a continued destocking phase since early July, with nearly three consecutive weeks of destocking. After a destocking of 10,000 mt WoW from last Thursday, the inventory gap between Foshan and Wuxi widened to 74,000 mt.

Overall, the accelerated decline in aluminum prices may stimulate an increase in downstream pick-up demand, and the pick-up from domestic aluminum ingot warehouses in the second half of July are expected to continue their good performance. However, the supply side of domestic aluminum ingots remains relatively loose. SMM expects that although domestic aluminum ingot inventory may see a slight decrease in July, the decline will be limited, likely fluctuating between 750,000-850,000 mt.

Regarding aluminum billet inventory, amid the off-season, the further decline in prices did not lead to a significant improvement in domestic aluminum billet pick-up from warehouses. Meanwhile, the concentrated price support of aluminum billet conversion margins caused downstream players to maintain a bearish outlook. Last week, aluminum billet pick-up from warehouses did not change much, down 1,300 mt WoW to 41,100 mt. By the end of this week, the overall arrival of aluminum billets remained low, and domestic aluminum billet inventory continued to slightly decrease after the weekend. According to the latest statistics from SMM, as of July 22, domestic aluminum billet social inventory was 136,600 mt, down 4,100 mt from last Thursday. With the reduction in the supply of northern aluminum billets, the inventory situation in various parts of east China has improved recently, with different degrees of destocking. However, in south China, due to a slight increase in aluminum billet supply and poor downstream operations during the off-season, weak demand remains the main theme of the recent aluminum billet market. South China continues to see slight inventory accumulation, and domestic aluminum billet inventory remains at a high level for the same period in nearly three years, still 50,800 mt higher YoY. Regarding the future trajectory of domestic aluminum billet inventory, entering late July, with off-season demand still weak and supply slightly excessive, domestic aluminum billet destocking will remain weak. It is expected that July aluminum billet inventory will still fluctuate between 130,000-180,000 mt.

Regarding aluminium billet conversion margins, with the narrowing Guangdong-Shanghai price spread, the slight rebound in extrusion production this week, and changes in inventory conditions, the conversion margin spread between south China and east China has almost been fully corrected, approaching "same price in three regions." As of July 22, the conversion margin of φ120 billets in Nanchang rose to 350 yuan/mt, up 70 yuan/mt from last Thursday, while in Wuxi, it remained stable at 350 yuan/mt from a week ago. According to SMM, recently, low-price aluminum billet sources in Nanchang have been scarce, with sellers holding firm on prices, making the conversion margin the highest among the three regions. However, downstream buyers are mostly bearish and hesitant, leading to unsatisfactory actual transactions, showing a sluggish situation. Meanwhile, with the recent stabilization of conversion margins in south China above 300 yuan/mt, aluminum billet factories in neighboring provinces have generally found profitable space, causing production and shipment pace to react swiftly. The arrivals of aluminum billets in south China have slightly increased, but the sustainability of destocking and rising conversion margins is somewhat lacking. Currently, the conversion margin of φ120 billets in Foshan is reported at 400 yuan/mt, up 20 yuan/mt from last Thursday. Considering the continued high range of the Guangdong-Shanghai price spread, it is expected that the conversion margin of φ120 billets in south China will likely remain above 300 yuan/mt within the month.

Aluminum billet demand side, domestic aluminum spot and SHFE aluminum prices fell rapidly during the week. However, under the backdrop of the off-season, demand remained weak, and the price correction failed to quickly improve company orders. Last week, the operating rate of leading domestic aluminum extrusion companies remained stable at 50%, with a slight WoW fluctuation of 0.7 percentage points. By segment, construction extrusion remained sluggish. Although companies in south China performed moderately better than other regions, according to the SMM survey, the order volume and operating rate of construction extrusion in south China also showed varying degrees of decline. Industrial extrusion remained stable, with some industrial extrusion plants receiving spillover orders after a company's explosion and shutdown, leading to a rebound in the operating rate. Overall demand showed no signs of improvement. Overall, the off-season atmosphere for aluminum extrusion in July was strong, with the operating rate running steadily but weakly.