First Week of September Shows Significant Narrowing in Spot Discounts of Aluminum, Outlook for the Future [SMM Analysis]

In the first week of the "September peak season," the aluminum market continuously declined after macro sentiments receded. By Friday, the most-traded SHFE aluminum contract closed at 19,125 yuan/mt, down 410 yuan/mt WoW, with the weekly low recorded at 19,160 yuan/mt. However, aluminum downstream demand improved in September, and spot market transactions picked up. The spot-futures price spread showed a strong rebound amid the continued weakness in futures. By Friday, the spot discount for SMM A00 narrowed to 20 yuan/mt against the front month contract, an increase of 60 yuan/mt compared to the end of August. Central China spot market performance was bright, with the SMM A00 (Central China) price turning into a spot premium of 20 yuan/mt against the front month contract, up 160 yuan/mt compared to late August. Will the spot-futures price spread continue to improve, and can the spot premium in Central China be sustained?

Key drivers for the recent improvement in the spot-futures price spread:

Market optimism and proactive low-price stocking by downstream buyers

In late August, aluminum prices bottomed out and rebounded quickly to around 20,000 yuan/mt. With downstream raw material inventories depleting in the off-season, the improvement in downstream orders in September revived market stocking demand. The recent decline in aluminum prices provided downstream buyers the opportunity to restock, improving spot transactions and benefiting the narrowing of the spot-futures price spread.

Decrease in casting ingot production, aluminum ingot social inventory peaked

According to SMM statistics, as of September 5, 2024, the total social inventory of aluminum ingots was 794,000 mt, with 668,000 mt of domestic circulating inventory, a decrease of 17,000 mt WoW but an increase of 277,000 mt YoY. Outflows from warehouses decreased 900 mt WoW to 102,800 mt last week. However, with further aluminum price pullbacks and a recovery in market confidence, outflows are expected to rise significantly this week.

Significant increase in the proportion of liquid aluminum in Qinghai, Gansu, while arrivals in Gongyi tightened

As one of the major aluminum spot trade regions in China, Gongyi is a key consumption and circulation area for aluminum ingots from northwest, central, and north China. In July and August, the domestic processing products like aluminum billets faced an off-season, leading to concentrated production cuts by processing enterprises in Qinghai and Gansu. Aluminum plants increased their casting ingot production, resulting in ample spot market supply, especially in central China, where significant spot discounts prevailed. But in September, the proportion of liquid aluminum in regions like Qinghai increased significantly, and some aluminum plants ceased casting ingots. Arrivals in Henan declined this week, and traders, optimistic about the future market, were reluctant to sell. Coupled with increased restocking by downstream plate/sheet, strip and foil enterprises, the regional spot market saw a shift to spot premiums.

SMM brief comment: In the short term, the operating rate of industries like plate/sheet, strip and foil in Gongyi improved. With insufficient aluminum scrap supply in the region, the proportion of primary aluminum usage by some downstream enterprises increased, stimulating local spot market transactions. The price spread between Henan and Shanghai turned into a spot premium, encouraging shipments from northwest to central China, potentially improving arrivals in regions like Gongyi next week, which may suppress sustained rises in local spot premiums. The expected reduction in arrivals in Wuxi, combined with the impending delivery period next week, may support spot discounts. In the medium and long-term outlook for September, downstream processing sectors reported favorable news, leading to improved demand, which could further increase the operating rate of intermediate products like aluminum billets. The proportion of liquid aluminum is expected to reduce to around 74%, with casting ingot production likely to decline further. As supply-side pressure continues to ease and demand for aluminum plate/sheet and foil, as well as industrial extrusion, gradually recovers from the off-season slump, it will provide early support for aluminum ingot consumption and spot premiums/discounts performance.