Macro front sentiment weakens, long-term oversupply pressure still exists

Stock image for referential purposes only

Macro perspective

The US-Iran situation saw a temporary easing, with market expectations for restored strait navigation rising. International oil prices pulled back for three consecutive days, and the geopolitical risk premium continued to fade. However, the outlook for US-Iran negotiations remains uncertain, and regional instability has not been completely eliminated.

The Jackson Hole Symposium will be held from August 27 to 29, where Fed Chairman Warsh will deliver his first major policy speech in office. The market is closely watching his remarks on inflation and the rate hike path. The US July PCE price index came in slightly above expectations, with core PCE remaining sticky.

Annual inflation stayed at 3.7 per cent, and the probability of a September rate hike implied by federal funds futures rose to around 40 per cent, while a December rate hike has been fully priced in by the market. Driven by rising rate hike expectations, the US dollar index rose, and the strong dollar exerted some pressure on the nonferrous metals sector.

Fundamentals

In overseas markets, aluminium production resumptions and new capacity outside China continued to ramp up as planned, while damaged capacity in the Middle East is gradually recovering. The market’s expectation of the global aluminium market shifting from tight to loose in the long term persists, continuing to cap the upside room for aluminium prices.

However, LME visible inventory currently remains at a historically low level of around 250,000 tonnes, and such low inventory provides bottom support for LME aluminium. As oil prices pulled back, smelting energy costs outside China edged down, weakening cost support for aluminium prices. The improvement in spot premiums was only moderate, and bulls lacked sustained momentum to push higher.

In the Chinese market, on the inventory front, China’s aluminium social inventory continued its destocking trend, falling to the level of 852,000 tonnes and displaying counter-seasonal destocking characteristics, which provides strong support for aluminium prices. On the demand side, currently, operating rates at downstream processing enterprises remain at neutral levels.

As the traditional September peak season approaches, the market expects subsequent demand improvement. However, downstream pre-stocking is limited; the market is still waiting to see how actual demand materializes during the peak season, and spot transactions are mainly based on rigid demand.

Comprehensive view

Overall, macro headwinds on aluminium prices have strengthened somewhat recently. Policy uncertainty from the Jackson Hole Symposium and Warsh’s first speech, the strengthening US dollar index coupled with rising rate hike expectations, and simultaneously, the fading US-Iran geopolitical risk premium and the oil price pullback together form resistance for aluminium prices.

However, continuous destocking in China and the approaching September peak season expectations provide strong support at lower levels. Amid interwoven bullish and bearish factors, aluminium prices are expected to continue to consolidate at highs next week. The most-traded SHFE aluminium contract is expected to trade in the range of RMB 23,400-24,100 per tonne next week, while LME aluminium is expected to trade in the range of USD 3,150-3,280 per tonne.

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.