Destocking against the trend: Is the surge in aluminium prices inevitable or accidental?

The recent counter-seasonal destocking of domestic aluminium ingots seems to be consistently reflected in the SHFE aluminium futures market. According to SMM statistics, as of January 16, 2025, the social inventory of domestic aluminium ingots stood at 440,000 tonnes, with 314,000 tonnes of domestically available aluminium inventory, down 15,000 tonnes from Monday and 19,000 tonnes from last Thursday. Notably, as of mid-January 2025, the current domestic aluminium ingot inventory has decreased by 1,000 tonnes compared to the 441,000 tonnes in the same period last year, marking a three-year low on a Y-o-Y basis. This has significantly boosted market confidence that the post-Chinese New Year inventory buildup may fall short of expectations.

Coupled with the unexpected cooling of the US core CPI announced, hopes for a US Fed interest rate cut within the year have been reignited. As of today's close, the most-traded SHFE aluminium 2502 contract closed at RMB 20,300 per tonne, having surged to near the 60-day moving average during the morning session, with a short-term high refreshed at RMB 20,425 per tonne, up nearly RMB 500 per tonne W-o-W.

A closer look at the mid-week regional destocking of aluminium ingots reveals that out of the nationwide destocking of 15,000 tonnes, Gongyi alone accounted for 13,000 tonnes.

Analysing the latest situation of mainstream supplies nationwide, especially in Gongyi, SMM identifies two reasons for this week's destocking from the inflow side:

(1) Temporary suspension of railway shipments in Qinghai: According to an SMM survey, railway shipments in Qinghai have been disrupted due to pending confirmation of freight rate reductions. Negotiations are ongoing, awaiting the release of a new railway schedule after the 15th to finalise the rate reductions. Currently, shipments from Qinghai rely mainly on direct truck deliveries to downstream Gongyi, significantly impacting local inflow volumes. Despite the destocking, local circulating supply is not tight, leading to a continued rapid decline in spot prices.

(2) Reduced railway shipment efficiency in Xinjiang: According to an SMM survey, a large volume of aluminium products shipped from Xinjiang remains in transit, with no concentrated arrivals yet. The Spring Festival travel rush has extended transit times. Feedback from a Gongyi warehouse indicates that concentrated arrivals are expected to begin over the weekend, with inventory likely to increase by next Monday.

From the outflow side, SMM provides the following analysis that in addition to last week's factors:

(1) Insufficient price difference between primary metal and scrap, leading to increased substitution of aluminium scrap with primary aluminium.

(2) Frequent cargo pick-up and outflows from warehouses by downstream buyers this week. Feedback from downstream indicates that the main reason is the limited inflow of aluminium ingots, coupled with factories gradually starting their holidays next week. Those who restocked at lower prices earlier have begun picking up goods. In central China, downstream restocking demand this week has exceeded expectations. Overall feedback includes: “Downstream orders on hand still exist. Some domestic orders were postponed due to earlier rush exports, and there are also temporary impacts from environmental protection measures. The substitution of aluminium scrap remains a factor, depending on order conditions. Overall, the use of aluminium scrap is higher than in 2023.” SMM will continue to release the latest survey updates on the pre-holiday operating conditions of downstream sectors in central China. Stay tuned.

However, despite the recent favourable factors for destocking and the slight downward revision of post-holiday inventory buildup expectations, SMM believes that the overall supply pressure of domestic aluminium ingots before and after the Chinese New Year cannot be ignored.

The off-season atmosphere for domestic aluminium demand persists, with most downstream sectors entering holiday mode by year-end. Meanwhile, aluminium prices have quickly rebounded above RMB 20,000 per tonne, significantly dampening downstream purchasing interest. Subsequent outflows of aluminium ingots are likely to weaken. On the inflow side, with Xinjiang shipments having normalised for some time, in-transit volumes are expected to increase significantly in the two weeks before the holiday, potentially intensifying spot market pressure. The inventory buildup turning point may be confirmed in the short term.

SMM expects that with the end of concentrated pre-holiday restocking and the rebound in aluminium prices, domestic aluminium ingot inventory may enter a continuous buildup phase in the second half of January. Pre-holiday inventory may rise to around 500,000 tonnes, with Q1 inventory peaks potentially reaching 850,000-900,000 tonnes. Although the Q1 peak forecast is lower than the previous estimate of 1-1.1 million tonnes due to the unexpected inventory performance since December's price correction, the post-holiday peak may still exceed last year’s level due to a significant Y-o-Y increase in casting ingot production.

Turning to aluminium billet inventory, as downstream sectors gradually enter holiday mode, overall circulating supply remains ample, and aluminium billet transactions are expected to enter a phase of nominal pricing without actual trades. According to SMM statistics, as of January 16, domestic aluminium billet social inventory stood at 151,100 tonnes, with an additional buildup of 8,500 tonnes from Monday and 14,100 tonnes from last Thursday. On a Y-o-Y basis, the gap with the same period last year has widened further to 67,300 tonnes, remaining at a three-year high.

SMM expects domestic aluminium billet inventory to continue building up in January, with pre-holiday inventory potentially reaching 180,000-200,000 tonnes and post-holiday peaks around 300,000-350,000 tonnes.

Source: SMM