Macro and fundamentals intertwined with bullish and bearish forces, short-term aluminium prices expected to mainly consolidate and adjust

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US June CPI fell 0.4 per cent M-o-M, the first month-on-month contraction since 2020, prompting the market to lower its expectations for US Fed interest rate hikes. However, Fed Chairman Warsh bluntly expressed "zero tolerance" for the persistent five-year high inflation, displaying a tough hawkish stance.

According to CME data, the probability of a rate hike was 53.5 per cent in September, rising to 61.8 per cent in October and further to 74 per cent in December. The pressure on the valuation of the nonferrous metals sector from rate hike expectations has never fully dissipated. Elsewhere, renewed conflict in the Middle East and the less-than-expected progress in US-Iran negotiations have intermittently roiled futures with geopolitical risk premiums.

Fundamentals side:

Supply side, this week, the proportion of liquid aluminium in China's aluminium industry rose 0.37 percentage points W-o-W, mainly driven by strong aluminium billet processing fees, which increased the share of direct liquid aluminium supply and further reduced aluminium ingot casting.

Outside China, with the ongoing ramp-up of new projects and production resumptions, aluminium supply is expected to continue rising. Overall, however, the global aluminium ingot destocking trend is unlikely to reverse in the short term.

Demand side, the downstream processing industry is in the traditional consumption off-season, with divergent sector performance but mostly under pressure. The operating rate of aluminium downstream processing industry leaders registered 61.3 per cent, down 0.6 percentage points M-o-M. The SHFE/LME aluminium price ratio repaired, squeezing downstream export profits. As orders on hand are being digested, exports' support for demand is expected to weaken.

Inventory side, this week, China's aluminium social inventory continued its destocking trend. As of Thursday, aluminium ingot social inventory in China fell by 54,000 tonnes from the previous Thursday and by 23,000 tonnes from this Monday. This week, aluminium prices mainly consolidated in a narrow range, downstream demand was weak, buying sentiment was somewhat cautious, and warehouse withdrawals slowed.

In summary, the Middle East situation remains volatile, concerns over rate hikes persist, supply is continuing to recover, but the destocking pattern is difficult to reverse in the near term. Amid the tug-of-war between longs and shorts, aluminium prices are expected to consolidate in the near term.

The most-traded SHFE aluminium contract is expected to trade in a range of RMB 22,500–23,500 per tonne next week, while LME aluminium is expected to trade in a range of USD 3,050–USD 3,250 per tonne. Going forward, close attention should be paid to the production resumption progress in the Middle East and the trajectory of geopolitical conflicts, LME aluminium ingot inventory changes, as well as downstream processing orders and aluminium semis export data in China.

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.