Divergent downstream consumption coupled with destocking, SHFE aluminium short-term oscillation and adjustment

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Futures: The most-traded SHFE aluminium 2607 contract closed at RMB 24,310 per tonne, down 0.29 per cent. The price was running below the MA5 (24,466.00), MA10 (24,440.50), MA30 (24,582.83), and MA60 (24,674.17) moving averages. Short- and medium-term moving averages were gradually turning downward, with the overall structure in the doldrums, and the upper moving averages forming resistance. The MACD indicator DIF (-77.3342) was below the DEA (-73.8095), with the MACD green bar at -7.0494. Bearish green bars slightly emerged, and bullish momentum was gradually weakening.

The suggested core trading range for SHFE aluminium is RMB 24,000-24,800 per tonne. The LME aluminium 3M contract closed at USD 3,663 per tonne, down 0.22 per cent, edging down slightly. The price was running below the MA5 (3,704.90) and MA10 (3,683.75), while holding above the MA30 (3,605.63) and MA60 (3,522.65). Long-term moving averages remained in a bullish alignment, with short-term slight pressure but a stable medium-term upward trend.

The MACD indicator DIF (44.0187) was below the DEA (45.4665), with the MACD green bar at -2.8956. The indicator turned from red to green, with short-term bullish momentum slightly weakening while the medium-term bullish pattern remained intact. The suggested core trading range for LME aluminium is USD 3,650-3,800 per tonne.

Macro front: China side, the PBOC conducted RMB 500 billion in outright reverse repo operations on June 5, with a tenor of 3 months. In June, RMB 800 billion in 3-month outright reverse repos will mature. After the June 5 operation, a net RMB 300 billion will be drained, marking the fourth consecutive month of reduced rollovers for 3-month outright reverse repos.

Ex-China side, US President Trump said he would not rule out meeting with Iran's new supreme leader if the US and Iran ultimately reach a deal. Trump reiterated that the US would never allow Iran to possess nuclear weapons, and that the US had "completely destroyed" Iran's nuclear facilities in a previous strike. US Fed side, with the June 17 rate decision approaching, CME FedWatch data showed a 96.2 per cent probability of rates remaining unchanged in June and an 84.3 per cent probability in July.

The market even began discussing the possibility of a rate hike, with CME data showing a 12.3 per cent probability of a 25-basis-point rate raise in July. Russian President Putin said Russia was fully prepared and willing to hold peace talks with Ukraine at a US military base in Anchorage, Alaska. Putin also said that controlling the Donbas region and reaching a peace agreement with Ukraine were not contradictory.

Fundamentals: Supply side, according to SMM data, China's aluminium production edged down this week. The proportion of liquid aluminium rebounded 0.12 percentage points W-o-W. Downstream demand for liquid aluminium was moderate, and the key focus remained on aluminium semis exports. On the inventory side, as of Thursday, China's aluminium ingot social inventory destocked by 26,000 tonnes W-o-W from Thursday and by 11,000 tonnes from Monday, with the destocking pace accelerating.

Downstream processing sectors showed divergence. Although it was the off-season, strong export demand in some sectors partially offset weak domestic demand. Operating rates for secondary alloy, aluminium plate/sheet and strip, and aluminium foil declined on a weekly basis, while primary alloy operating performance recovered. Aluminium wire and cable and aluminum extrusion sectors remained generally stable. Overall, the weekly operating rate of leading downstream enterprises edged down 0.1 percentage points W-o-W.

Primary aluminium market: In early trading, the SHFE aluminium 2606 contract fluctuated downward, with the overall price centre rising significantly from the previous trading day. Affected by the sharp rise in aluminium prices, downstream buying sentiment weakened notably. The east China market was relatively soft yesterday, with transaction prices continuing to weaken. Mainstream spot quotes in the market ranged from SMMA00 minus RMB 20 per tonne to minus RMB 10 per tonne.

Yesterday, the east China market shipment sentiment index was 3.01, flat WoW; the purchase sentiment index was 2.7, down 0.13 W-o-W. Yesterday, SHFE aluminium futures prices continued to rise from the early session, coupled with weak off-season orders from downstream processing enterprises in central China, and overall buying sentiment in the market remained subdued. Enterprises mainly focused on digesting inventories and purchasing as needed in small quantities, with only some traders purchasing in large volumes for term arbitrage when premiums were low.

The actual transaction price range in the central China market ultimately centred around a discount of RMB 230-270 per tonne against the SHFE aluminium 06 contract. Yesterday, the central China market shipment sentiment index was 2.89, flat WoW; the purchase sentiment index was 2.17, down 0.01 W-o-W.

Aluminium scrap: Yesterday, the SMM A00 price fell RMB 250 per tonne from the previous trading day, and the aluminium scrap market followed the decline overall. Supply side, regulatory enforcement of the "reverse invoicing" policy continued to tighten.

Tax rebate cancellations and stricter tax audits in some provinces led to rising costs of invoiced raw materials, with some enterprises in Anhui, Jiangxi and other regions already experiencing production cuts or suspensions. Warehouse inflows at aluminium scrap distribution hubs declined Y-o-Y, and aluminium tense scrap inventory decreased due to reduced inflows.

Currently, compliance costs in the raw material recycling process remain elevated, available invoiced supplies continue to be tight, and invoice scarcity has become a core price support. Meanwhile, amid disruptions from the US-Iran conflict, the price spread between domestic and overseas markets was inverted, making imported low-priced quality supplies scarce and weakening supplementation to the domestic market.

Demand side, off-season effects emerged, with operating rates of downstream scrap utilisation enterprises running at low levels. End-user order follow-through was sluggish, and enterprises maintained strategies of purchasing as needed with low inventory, creating a cautious purchasing atmosphere.

Aluminium scrap market prices are expected to continue holding up well at elevated levels. The persistent tightness of compliant invoiced supplies will provide bottom support for aluminium scrap prices. The lagged contraction effect of imported aluminium scrap has not been fully released, and subsequent port arrivals will remain at low levels.

Under the pattern where the overseas market outperforms the domestic market, import supplementation will remain limited. Meanwhile, as the off-season deepens, downstream scrap utilisation enterprises face concerns over order sustainability. These enterprises maintain strategies of purchasing as needed and keeping low inventory, making it difficult for the purchasing atmosphere to improve significantly. Currently, the industry faces elevated invoicing risks, with strengthening expectations of supply-side contraction, while weak downstream demand exerts downward pressure, presenting an overall pattern of weak supply-demand dynamics.

Secondary aluminum alloy: Spot market: Yesterday, SMM's ADC12 quote was lowered by RMB 100 per tonne to RMB 23,900 per tonne, with the market showing some resistance to decline. The price pullback was mainly driven by the weakening of SHFE aluminum and aluminum alloy futures; however, tight supply of compliant aluminum scrap and high raw material and compliance costs for enterprises provided some price support. In addition, production cuts by some enterprises tightened spot cargo circulation, with shortages even occurring in certain regions, supporting some manufacturers in holding firm on their quotes. In the short term, prices are expected to move sideways, and if the tight situation regarding invoice sources and raw material supply remains unresolved, the downside room for ADC12 will be relatively limited.

Aluminium market summary: The tug-of-war between longs and shorts on the macro front is intensifying. Amid risks from Middle Eastern geopolitical tensions, wait-and-see sentiment is expected to persist in the market. The ex-China supply gap is expected to provide strong floor support for aluminium prices, and expectations of rising energy costs are also providing a bullish driver for aluminium prices.

However, high inventory pressure in China remains relatively evident and is expected to limit the upside room for domestic aluminium prices. In the short term, domestic aluminium prices are expected to mainly undergo range-bound adjustments.

Note: This article has been issued by SMM and has been published by AL Circle with its original information without any modifications or edits to the core subject/data.