SHFE Aluminium to Remain under Pressure in the Medium and Long Run

SHANGHAI, Jul 25 (SMM) - The most-traded SHFE 2208 aluminium contract bottomed out last week. The contract opened at 17,330 yuan/mt last Monday, with its weekly low and high at 17,270 yuan/mt and 18,315 yuan/mt respectively before closing at 17,995 yuan/mt on Friday afternoon, up 840 yuan/mt or 4.9% on the week. LME aluminium opened at $2,336.5/mt last Monday, with its weekly low and high at $2,331/mt and $2,464/mt respectively before trading at $2,443/mt as of CST 15 on Friday, up 5.6% on the week.
On the macro front, the European Central Bank (ECB) raised interest rates more aggressively than expected last Thursday as worries about runaway inflation outweighed growth concerns. The ECB raised its benchmark deposit rate by 50 basis points to zero instead of the 25 basis points it had previously guided, the first rate hike by the ECB in 11 years. France’s preliminary manufacturing PMI was 49.6 in July, a new low since November 2020. Germany’s preliminary manufacturing PMI was 49.2 in July, lower than expectations for 50.6 and 52 in June, a new low in 25 months. Spiking expectations for overseas economic recession weighed on the commodity market. 
Fundamentals: The domestic aluminium supply maintained an upward trend. Some smelters in Sichuan reduced their output slightly due to staggered power use, while smelters in other regions maintained normal production. Customs data showed that China recorded a net import of 21,900 mt of primary aluminium in June, while the figure stood at 20,500 mt from January to June, a drop of 97.2% YoY. The operating rates of aluminium downstream enterprises were stable as a whole last week. The consumption of aluminium ingots and billets in south China declined significantly. The demand was relatively strong in east China, and modest in central China. Tightening railway capacity in Xinjiang led to fewer arrivals, allowing the domestic aluminium ingot social inventory to extend the decline. 
Based on both machine learning and futures technical indicators, the most-traded SHFE aluminium contract is expected to fluctuate sideways or go down this week.
Despite the continued increase in the operating capacity, the domestic aluminium supply is not in a large surplus. Some loss-making smelters may undertake maintenance if aluminium prices fall further. Low inventory and high cost will support aluminium prices, while bearish macro front and poor overseas demand will prevent aluminium prices from going up. The most-traded SHFE aluminium contract and LME aluminium are likely to move between 17,300-18,500 yuan/mt and $2,350-2,500/mt respectively this week.