Macro Headwinds and Poor Fundamentals to Expose Aluminium Prices to Downside Risk after the Labour Day Holiday

SHANGHAI, Apr 28 (SMM) – Macro headwinds and potential accumulation of social inventory will expose aluminium prices to downside risk. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 18,200-19,000 yuan/mt and $2,290-2,480/mt respectively next week. Factors to watch: The Federal Reserve's interest rate meeting and supply situation in Yunnan. Notes: The SHFE will be closed during May 1-3 for the Labour Day holiday. 

Macro front: The US one-year sovereign CDS soared to 106 basis points, triggering market concerns. The US treasury secretary warned of "US economic disaster" if the debt ceiling is not raised. Subsequently, the collapse of the stock price of the First Republic Bank of the United States compounded market panic. Data released on Thursday showed that the US GDP rose merely 1.1% in the first quarter, far below market expectations. The preliminary reading of annualised US core PCE price index, an important inflation indicator, rose as much as 4.9% in first quarter, higher than the 4.7% expected. Growing inflation, sluggish economy, coupled with soaring risk of credit defaults, have put the US Federal Reserve in a difficult situation. The Fed will decide whether to continue raising interest rates at its policy meeting on May 2-3.

In China, the Ministry of Commerce stated that China's foreign trade situation is still complicated and tough. According to data from the National Bureau of Statistics, the profits of industrial enterprises above designated size in the country fell by 21.4% year-on-year in the first quarter, which somehow dented market confidence.

Fundamentals: The domestic operating aluminium capacity added 400,000 mt MoM to around 40.65 million mt in April, SMM data showed. The growth was mainly contributed by Guizhou, Guangxi, and Sichuan, where there are still 700,000 mt of idled capacity waiting to be put into operation in the future. This week, aluminium extrusion was the only downstream sector that saw an increase in operating rates, which was largely driven by the rush to deliver orders before the upcoming Labour Day holiday. Operating rates in the secondary aluminium alloy sector declined due to poor demand. The rest of downstream sectors saw stable production. Wire and cable producers will be able to maintain high operating rates thanks to the peak season of power grid construction. Affected by poor orders and wait-and-see sentiment among end-users triggered by continuously falling aluminium prices, operating rates in aluminium plate/sheet, strip and foil sectors barely rose. Most downstream enterprises hardly stocked up before the Labour Day holiday, and their operating rates will probably drop after the holiday due to poor new orders. The domestic aluminium ingot social inventory dropped significantly next week, but may accumulate slightly after the holiday.