Risk aversion sentiment and weak fundamentals to put downward pressure on aluminum prices

In the week, the macro fundamental was intertwined with bullish and bearish factors, causing significant fluctuations in aluminum prices. Early in the week, the Chinese government made consecutive announcements to support the real estate sector, boosting market demand. The European Central Bank President indicated a possible rate cut in June, pushing aluminum prices higher. The US Fed released the minutes of its May meeting, with hawkish voices resurfacing. Meanwhile, the US announced a new draft of Section 301 tariffs on China, causing aluminum prices to fall from highs.

Fundamentals: During the week, domestic aluminium capacity continued to grow. Most enterprises in Yunnan achieved an operating rate of over 85%, and the third phase of the Huayun project in Inner Mongolia was put into operation on May 18. However, it will take some time before full production, and the contribution to May's output is minimal. The operating capacity of domestic aluminium may reach around 42.9 million mt by the end of May, gradually highlighting supply pressure. In the week, spot alumina prices continued to rise, pushing up domestic aluminium costs. As of May 23, SMM estimated the real-time cost of domestic aluminium at 17,826 yuan/mt, up 212 yuan/mt WoW. The real-time profit of domestic aluminium was about 2,924 yuan/mt, down 142 yuan/mt WoW. The import window remained closed during the week. According to April customs data, the net import volume of primary aluminium was about 206,000 mt, but general trade volume was only 97,000 mt. Nearly 120,000 mt of imports were held in bonded areas under supervision, awaiting opportunities for sellers to arbitrage before entering the domestic spot market. LME aluminium inventories continued to rise, hitting 1.128 million mt as of May 23, up 35,000 mt WoW. Domestic downstream operating rate was slightly weak, with end-users hesitant to place orders due to high prices. Aluminum semis processing enterprises faced significant pressure from finished product inventories, leading some to reduce operating rate. Additionally, high primary aluminium prices forced some plate/sheet and strip enterprises to seek secondary aluminium alloy resources to replace primary aluminium, increasing the proportion of scrap used. The spot aluminium market saw poor transactions in the week, with spot discounts widening and aluminium ingot inventories remaining high.

From a technical perspective, the model predicts that the price range of SMM A00 aluminum average price will be [20,545, 20,580], the price center will be 21,040, the unit is yuan/mt, the extreme price range will be [19,920, 22,170], the normal price range will be [20,340, 21,780], and the conservative price range will be [20,750, 21,380]. The price is expected to move sideways. The support range will be [20,340, 20,750], and the resistance range will be [21,380, 21,780]. The model predicts that the price range of the most-traded SHFE aluminium contract will be [20,535, 21,730], with the price center of 21,140, and the unit is yuan/mt. The extreme price range will be [19,880, 22,270], the normal price range will be [20,320, 21,910], and the conservative price range will be [20,750, 21,550]. The price is expected to move sideways. The support range will be [20,320, 20,750], and the resistance range will be [21,550, 21,910].

Overall, from a macro perspective, the US Fed Minutes were hawkish, showing the Fed's determination to reduce inflation and hinting the possibility of an interest rate hike. It also emphasized that the suppressive effect of high interest rates on the economy is diminishing. The Iranian Prime Minister's accident, the ongoing Russia-Ukraine war, and increasing geopolitical risks have intensified risk aversion among investors. Domestically, stimulus policies were introduced in the real estate sector, such as lifting purchase restrictions, lowering mortgage rates, reducing down payments, and government purchases of houses, which are favorable for stabilizing the real estate market and boosting confidence in the demand for building materials like aluminum semis. Fundamentally, the domestic aluminium operating capacity continued to increase, with good progress in production resumption in Yunnan, which may be completed in June. The domestic aluminium capacity continued to increase. On the consumption, high aluminum prices somewhat inhibited short-term consumption, and there is significant pressure on spot sales, leading to a continued discounts. However, domestic aluminum consumption is still expected to increase, and the initial signs of a mismatch between supply and demand have emerged. In the short term, the hawkish stance of the US Fed and geopolitical risks led to a risk aversion of funds, causing an overall correction in the non-ferrous metals market. There are few bullish drivers, and it is expected that the market may fluctuate sideways. SMM predicts that most-traded SHFE aluminum will fluctuate at 20,320-21,550 yuan/mt this week, and LME aluminum may fluctuate at $2,500-2,730/mt. We will continue to pay attention to price difference between the domestic and overseas markets and domestic downstream operating rate.