Tug-of-war between longs and shorts in the aluminium market intensifies, is expected to support bottom resilience

Futures: Yesterday, the SHFE aluminium 2504 contract opened at RMB 20,865 per tonne, peaked at RMB 20,895 per tonne, hit a low of RMB 20,820 per tonne, and closed at RMB 20,860 per tonne, up RMB 70 per tonne or 0.34 per cent from the previous day. LME aluminium opened at USD 2,687 per tonne, reached a high of USD 2,730 per tonne, a low of USD 2,686.5 per tonne, and closed at USD 2,730 per tonne, up USD 43 per tonne or 1.6per cent.

Macro: (1) US Fed's Bostic: Still expects two interest rate cuts this year, but there is significant uncertainty; Goolsbee: PCE data is unlikely to be as alarming as CPI data. If tariffs lead to higher inflation, the Fed will take it into account. (Bullish ★)

(2) US Treasury Secretary Besant: The Fed's September rate cut was too large; no plans to reassess gold reserves in the sovereign wealth fund; sanctions on Russia will be lifted if necessary. (Bullish ★)

(3) People's Bank of China: Implementing a moderately loose monetary policy, detailing 25 measures to support private economy financing. Expanding private enterprise bond financing, strengthening risk-sharing for private enterprise bonds, and supporting the issuance of sci-tech bonds, green bonds, and asset-backed securities by private enterprises. (Bullish ★★)

Fundamentals: (1) According to SMM statistics, as of February 20, domestic mainstream consumption area aluminium ingot inventory stood at 845,000 tonnes, up 27,000 tonnes W-o-W. (Bearish ★)

(2) Domestic mainstream consumption area aluminium billet inventory reached 315,300 tonnes, up 8,300 tonnes W-o-W, with the inventory turning point yet to form. (Bearish ★)

(3) On February 20, SMM statistics showed Shanghai Bonded Zone aluminium inventory at 62,500 tonnes and Guangdong Bonded Zone inventory at 12,700 tonnes, totalling 75,200 tonnes, up 4,700 tonnes WoW. (Bearish ★)

Primary aluminium market: Yesterday morning, SHFE aluminium front-month contract fluctuated at highs near RMB 20,750 per tonne above the daily average. In east China, the aluminium market rebounded to highs, with market sentiment dominated by a wait-and-see approach and sluggish transactions. However, some suppliers remained optimistic about the market outlook, controlling shipment pace with a clear sentiment to stand firm on quotes.

SMM A00 aluminium ingot was quoted at RMB 20,690 per tonne, up RMB 90 per tonne from the previous trading day, with SMM A00 aluminium ingot discount to SHFE aluminium 2503 contract at RMB 60 per tonne, unchanged from the previous day. In central China, traders were optimistic about the market outlook with a clear sentiment to stand firm on quotes.

However, as trucked goods arrived in bulk, squeezing station resources, transactions at premiums in central China remained challenging. Downstream processing enterprises, affected by the aluminium price rebound, mainly picked up goods under long-term contracts at monthly average prices, with sluggish spot order transactions.

SMM central China A00 aluminium ingot was quoted at RMB 20,560 per tonne, up RMB 90 per tonne from the previous trading day, with the Henan-Shanghai price spread at RMB 130, and actual market transactions near parity with SMM central China prices.

Secondary aluminium raw materials: Aluminium scrap market quotations were generally stable with slight increases. Baled UBC aluminium scrap prices rose by RMB 0-100 per tonne to RMB 15,150-15,950 per tonne (excluding tax), while shredded aluminium tense scrap prices remained stable at RMB 16,550-17,400 per tonne (excluding tax). Currently, traders have mostly resumed work, actively shipping goods, leading to increased aluminium scrap market circulation. However, due to limited end-use consumption recovery, price increases lacked momentum, with the price difference between primary metal and scrap slightly widening. In the short term, the price difference between primary metal and scrap is expected to fluctuate slightly.

Secondary aluminium alloy: Secondary aluminium prices remained mostly stable. Domestically, SMM ADC12 prices held steady at RMB 21,200-21,400 per tonne. In the import market, overseas ADC12 prices rose to USD 2,440-2,480 per tonne, with immediate profit margins for imported ADC12 narrowing to within RMB 100 per tonne. Although aluminium prices continued to rise yesterday, overall quotations in the secondary aluminium market remained stable, with limited upward momentum.

Recently, with traders resuming work and increased overseas imports, aluminium scrap market circulation has improved, slightly easing cost pressure for secondary aluminium plants. Current downstream demand recovery has been slower than expected, and with increasing market supply, prices are under pressure, leading to more low-priced resources in the market. In the short term, secondary aluminium alloy prices are expected to undergo narrow adjustments.

Summary: Recently, the aluminium market has been influenced by mixed bullish and bearish factors, presenting a "strong expectations, weak reality" pattern. On one hand, the current inventory buildup cycle has not ended, coupled with raw material price fluctuations weakening cost support, jointly limiting upward price space. On the other hand, macroeconomic easing expectations continue to ferment, combined with seasonal domestic consumption recovery expectations, gradually strengthening market bottom support.

In the short term, aluminium prices may continue to fluctuate, but caution is needed against the spillover effects of global risk asset volatility triggered by unexpected shifts in US and European monetary policy. Fundamentals side, the pressure of resumed production in the aluminium supply side has re-emerged, with domestic aluminium operating capacity expected to rise slowly in February. Alumina average spot prices have continued to weaken, driving aluminium costs further downward, with cost-side support continuing to weaken.

As both supply and demand show growth, and post-holiday demand recovery exceeds expectations, aluminium futures and spot prices remain strong despite the lack of cost support. Inventory-wise, current domestic aluminium ingot inventory buildup slightly exceeded expectations, with inventory likely to surpass last year's level by the end of February. Q1 inventory peak may be revised up to the 900,000-950,000 tonnes range, providing limited support for further short-term aluminium price increases.

Demand side, last week, operating rates of leading domestic aluminium downstream processing enterprises continued to recover, up 4.1 percentage points W-o-W to 60.8 per cent. This week, operating rates of leading domestic aluminium downstream processing enterprises continued to rise, but the growth rate slowed compared to the previous two weeks, up 0.8 percentage points W-o-W to 61.6 per cent.

Overall, downstream consumption remains in the recovery phase. In the short term, attention should be paid to the pace of peak season order fulfilment and the impact of aluminium prices on end-user purchase willingness. In the future, with increasing PV demand and full resumption of work and production by end-users, and limited supply-side increments, aluminium prices are expected to fluctuate at highs in the short term.

Source: SMM