Middle East conflict pushes up risk premium, aluminium ingot destocking supports aluminium price

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Macro perspective

The US-Iran situation escalated rapidly, as the US reinstated comprehensive oil sanctions on Iran, terminated the relevant memorandum of understanding, and launched strikes on over a hundred Iranian military facilities. Iran immediately retaliated, causing a sharp rise in geopolitical risk premiums in the Middle East.

Fundamentals

Markets outside China, the resumption of aluminium production and the release of new capacity continued overseas, gradually materialising global supply growth. Long-term expectations of a shift from tight to loose in the global aluminium market kept building, significantly suppressing the upside room for spot aluminium premiums abroad and exerting medium and long-term pressure on LME aluminium prices. Meanwhile, expectations of a persistently strong US dollar further constrained the upside for aluminium prices.

Domestic market, inventory side, China's aluminium ingot inventory continued destocking. According to SMM data, as of July 9, social inventory of aluminium ingots in China stood at 1.078 million tonnes, down by 52,000 tonnes W-o-W, maintaining a pullback trend and providing support for aluminium prices.

Spread side, the SHFE/LME aluminium price ratio continued to recover, with the ratio rebounding to 7.36 this Thursday, up from 7.28 W-o-W. Boosted by rising aluminium billet processing fees, the production enthusiasm of Chinese enterprises improved the proportion of liquid aluminium climbed steadily, and casting ingot volumes contracted.

Meanwhile, downstream substitution demand emerged, with alloy plants and extrusion plants switching to aluminium ingots to replace aluminium scrap and aluminium billet, driving rigid demand for aluminium ingots higher and suggesting the destocking pace may continue.

Overall assessment

Overall, Middle East geopolitical conflicts pushing up risk premiums, along with continued destocking of China's aluminium ingot, supported aluminium prices to hold up well. However, the ongoing release of aluminium capacity overseas and the US policy of a strong dollar will continue to suppress the upside room for prices, presenting clear resistance overhead.

Our comprehensive forecast is that short-term aluminium prices will consolidate on a strong note but encounter resistance. Next week, the most-traded SHFE aluminium contract is expected to trade in the range of RMB 22,400-23,400 per tonne, while LME aluminium is expected to trade in the range of USD 3,000-3,200 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.