Macro sentiment hedge weighs on the rise; China destocking accelerates, supporting the aluminium price bottom

Stock image for referential purposes only

Futures: On the night session of July 8, the most-traded SHFE aluminium contract opened at RMB  23,075 per tonne, reached a high of RMB 23,080 per tonne and a low of RMB 22,965 per tonne, and finally closed at RMB 23,020 per tonne, down 0.24 per cent from the previous close. During this period, after an early rebound, prices pulled back slightly, closing as a small bearish candlestick. Prices remained above the MA5 (23,005.80) and MA20 (22,964.75) moving averages, but were under pressure below the medium- and long-term moving averages of MA40 (23,266.60) and MA60 (23,522.23). The previous low of 22,250 served as effective support.

Overall, the market remained in a stage of rebounding from lows and repairing. Trading volume during this period was 58,900 lots, a significant decrease from the previous period, while open interest was 229,000 lots, down 3,322 lots. The futures showed signs of long position liquidation. From a technical perspective, on the 4-hour MACD, the DIFF (-155.84) was above the DEA (-255.53), maintaining a golden cross pattern, with the red histogram reading 199.37, indicating that bullish momentum was still expanding.

On July 8, LME aluminium opened at USD 3,140 per tonne, with a high of USD 3,165 per tonne and a low of USD 3,125.5 per tonne, before closing at USD 3,138.5 per tonne, a slight decline of 0.02 per cent from the previous close. During the session, prices extended their consolidation at lows, briefly rising before pulling back to close as a doji star. Prices held above the MA5 (3,126.63) but faced resistance at the MA10 (3,144.78).

Overall, they remained below the medium- and long-term moving averages of MA20 (3,232.66), MA40 (3,342.73), and MA60 (3,374.82). Moving averages across all timeframes maintained a bearish downward alignment. The previous low of 3,040.0 provided solid support. Trading volume for the day was 21,417 lots, a slight increase from the prior session, while open interest was 602,400 lots, up 2,151 lots. The futures exhibited slight signs of short position building.

On the daily MACD, the DIFF (-113.71) was below the DEA (-111.85), keeping the death cross pattern intact. The green histogram reading was only -3.73, indicating that bearish momentum was nearing exhaustion, and prices were expected to primarily consolidate at lows in the short term.

Macro front: At its June meeting, the US Fed kept the benchmark interest rate unchanged in the 3.50 per cent -3.75 per cent range, but the latest projections indicated that the market generally expects a potential rate hike this year, with 9 of the 18 policymakers anticipating a slight increase by the end of 2026.

According to CME "FedWatch": the probability of the Fed keeping rates unchanged in July is 69.0%, and a cumulative 25bp hike is 31 per cent. For September, the probability of rates staying unchanged is 31.1 per cent, a cumulative 25bp hike is 51.9 per cent, and a cumulative 50bp hike is 17 per cent.

Fundamentals: The aluminium scrap market is expected to continue its subdued consolidation pattern in H2, but with notable bottom support. The price difference between A00 aluminium and aluminium scrap has narrowed to a historical low. The constraints of the reverse invoicing policy continue to build a floor for aluminium scrap prices.

If primary aluminium prices stabilise and rebound, there is limited room for the spread to recover; if primary aluminium continues to decline, the substitution effect of aluminium scrap will accelerate, putting further pressure on the spread, and an extreme scenario where scrap prices invert against primary aluminium could even occur. In the near term, the reverse invoicing policy is unlikely to materially ease, and the tight supply of compliant tax-invoiced cargo will persist.

Focus should be on the enforcement standards in newly added provinces such as Shandong, changes in local tax inspection intensity, and whether policy details will see a window for optimisation and adjustment. On the inventory side, as of this Thursday, aluminium ingot inventory at major domestic consumption areas stood at 1.078 million tonnes, down 20,000 tonnes from Monday and down 52,000 tonnes from last Thursday.

Primary aluminium market: In early trading, the SHFE aluminium 2606 contract's trading centre was higher than the level at the same time the previous trading day. Yesterday, selling sentiment in the market strengthened compared to the previous day. Some downstream players turned bullish on near-term aluminium prices, and buying sentiment picked up. Downstream price acceptance improved from yesterday.

Mainstream transactions were concluded at parity to a premium of RMB 10 per tonne against the SHFE aluminium 2607 contract. In east China yesterday, the selling sentiment index was 3.07, up 0.06; the buying sentiment index was 3.00, up 0.20. While SHFE aluminium futures continued to rebound, bearish sentiment remained strong among downstream processing enterprises and trading firms engaging in both spot and futures markets in central China.

Such trading firms tended to widen the discount to purchase large volumes to profit from the price spread, while downstream factories, constrained by end-user orders and finished product inventories, saw persistently low purchase willingness. Ultimately, the actual transaction prices in central China settled around a discount of RMB 110-140 per tonne against the SHFE aluminium 2607 contract. In central China yesterday, the selling sentiment index was 2.87, down 0.02; the buying sentiment index was 2.14, up 0.04.

Aluminium scrap: Yesterday, SMM A00 spot aluminium closed at RMB 23,040 per tonne, up RMB 100 per tonne from the previous trading day, and the aluminium scrap market generally followed the uptick. Regarding the price difference, on July 8, the price difference between A00 aluminium and mixed aluminium extrusion scrap free of paint in Foshan stood at RMB 2,046 per tonne, while that for shredded aluminium tense scrap was RMB 732 per tonne.

Notably, under the dual impact of rapidly declining aluminium prices and tight invoice supply, the price spread for the aluminium tense scrap series narrowed sharply. Some cast aluminium alloy enterprises have begun to use A00 aluminium ingots instead of scrap as raw material for production. It is expected that the aluminium scrap market will continue to consolidate on a subdued note, but downside room is limited.

The mainstream range for shredded aluminium tense scrap priced based on aluminium content is expected at RMB 19,200-19,800 per tonne (excluding tax). On the supply side, the constraint from the reverse invoicing policy is unlikely to reverse in the near term, and the tight supply of compliant tax-invoiced cargo persists.

On the import side, the combined headwinds and the lagged suppression effect on actual port arrivals will gradually emerge over the coming months, and imported aluminium scrap supplementation will further weaken. Demand side, as the off-season deepens downstream operating rates remain low, with little substantive improvement in end-user orders.

Scrap utilisation enterprises will most likely continue purchasing as needed and maintain low inventory strategies. The price spread between primary aluminium and aluminium scrap has narrowed to a historical low, significantly eroding the economic advantage of aluminium scrap over primary aluminium. If aluminium prices continue to decline, the substitution effect will accelerate noticeably.

Secondary aluminium alloy: Spot market: Yesterday, quotes in China’s secondary aluminium alloy market mostly consolidated on a strong note, with the SMM ADC12 price rising by RMB 50 per tonne M-o-M to RMB 24,100 per tonne. Quotes diverged somewhat yesterday—boosted by the sustained rebound in aluminium prices and futures, some enterprises actively followed with price hikes, while others chose to hold off and watch for now due to lackluster downstream demand, slowing procurement pace among end-users, substantial shipment resistance, and limited motivation to adjust prices. Market sentiment turned cautious.

Overall, the ADC12 market yesterday saw both price-following hikes and wait-and-see approaches coexisting; the price uptrend lacked effective support from demand, and the market is expected to continue consolidating in the short term.

Aluminium market summary: On the macro front, weak US nonfarm payrolls for June pushed back expectations for US Fed interest rate hikes, and a weaker US dollar provided valuation support for nonferrous metals. However, hawkish statements from officials reaffirming high rates and balance sheet reduction limited the dollar's downside room.

The US-Iran resumption of nuclear consultations continued to compress the geopolitical risk premium, to some extent capping the upside room for commodities. Meanwhile, expectations for new aluminium capacity coming online outside China added a bearish medium and long-term supply factor. Domestically, positives stood out—the share of liquid aluminium continued to rise, aluminium ingot warehouse withdrawals over the past week hit a four-year high, and the pace of destocking has noticeably accelerated, underpinning SHFE aluminium.

Amid the interplay of bullish and bearish factors, dollar strength and supply/geopolitical headwinds outside China offset each other. After earlier overshooting, the downward momentum in LME aluminium slowed, with short-term movements centred on consolidating and repairing at lows. Supported by rapid destocking in China, the likelihood of domestic prices underperforming LME aluminium is low. SHFE and LME may show a slight divergence, while persistent one-sided weakness will be difficult to sustain.

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.