After the negative impact of the US tariff war in early April, the domestic aluminum price dropped nearly 19,000 yuan after the Qingming Festival holiday, reaching a new low since late August last year. Then it rebounded. Recently, after the main contract of Shanghai aluminum broke through the resistance of 20,300 yuan, the upward trend has accelerated. Based on the analysis of the macro and aluminum fundamentals, there may still be considerable room for aluminum to rise in the medium term. Meanwhile, the recent increase in crude oil prices has also had a positive impact on aluminum prices.
I. Macro Factors
The tariff war has eased
Major signs of easing in the tariff war between China and the United States have emerged. Important consensus was reached at the Geneva economic and Trade talks in early May, and the two sides have established a regular economic and trade consultation mechanism. Later, in the trade negotiations in London, China and the United States reached an agreement framework in principle, which had a positive impact on the global trade and economic situation.
Recently, domestic economic and financial data have shown marginal improvement
In May, China's retail sales of consumer goods rose by 6.4% year-on-year. The retail sales of consumer goods excluding automobiles increased by 7.0% year-on-year, and the retail sales of goods (excluding catering and services) rose by 6.5%. All these figures increased by 1.4% compared with April. The former reached a new high since December 2023, and the latter reached a new high since February 2024. During the same period, the growth rate of catering in retail sales was 5.9%. The growth rate of retail sales of goods was significantly faster than that of catering. In May, the industrial added value increased by 5.8% year-on-year, still in a continuous decline. However, the decline narrowed and rose by 0.61% month-on-month, ending the two-month decline. Real estate remains a drag on the economy, but the year-on-year declines in cumulative data such as new commercial housing sales, new construction area, and construction area have all narrowed. Coupled with the previously announced rapid recovery of M1 in May and the overall rebound of the manufacturing PMI, domestic economic and financial data are in a marginal recovery stage.
Second, the boost from the rise in crude oil prices
Since the beginning of May, international crude oil has been rebounding continuously from around $55. Recently, affected by geopolitical factors in the Middle East, crude oil has reached a new high since late July last year. From the perspective of historical price trends, the price trends of crude oil and aluminium have a strong positive correlation. During the stages when the crude oil price trend is rising or falling, the aluminum price usually shows a certain degree of following the rise or fall. This correlation is mainly due to the fact that both have common influencing factors in aspects such as the macroeconomic environment and energy costs. Electrolytic aluminum production is characterized by high power consumption, and power generation often relies on energy sources such as oil and natural gas. Fluctuations in crude oil prices can affect the energy cost of electrolytic aluminum production. If overseas energy prices continue to rise, it will bring rising cost pressure to overseas electrolytic aluminum production.
Iii. Supply and demand as well as inventory are positive
Supply constraints: In May, China's bauxite output was 5.3664 million tons, up 5.31% month-on-month and 8.97% year-on-year. In April, China imported 20.684 million tons of bauxite, a month-on-month increase of 25.62% and a year-on-year increase of 45.44%, reaching a record high. The domestic average profit of alumina, a downstream of bauxite, rebounded from -56.9 yuan per ton in the week ending April 18 to 451.5 yuan per ton, reaching a new high since the beginning of February this year. From January to May, the monthly output of alumina in China was at the highest level in the same period of history. Coupled with the cooling of the hype over the Guinean government's reissuance of mineral mining licenses in May, The price of alumina has dropped simultaneously. Against the backdrop of a decline in the upstream raw materials of aluminum, as of the end of May, according to MS data, the average smelting profit per ton of aluminum in China exceeded 4,000 yuan. However, due to the domestic production capacity red line of 45 million tons (the latest newly built capacity is 45.49 million tons, and the latest operational capacity is 44.12 million tons), and the latest capacity utilization rate has exceeded 97%, the growth space for aluminum production is extremely limited.
There is an increase in demand: The recently released real estate data as a whole remains weak, but other aluminum consumption sectors provide an increase in demand, such as the automotive and cable sectors. May data shows that domestic auto production increased by 11.3% year-on-year, returning to double-digit growth after two months. Meanwhile, the production of new energy vehicles rose by 31.70% year-on-year, maintaining a high growth rate.
Continuous inventory reduction: Currently, the inventory of aluminum in both domestic and overseas markets is in a continuous decline. As of June 19th, domestic social inventory was 450,000 tons, a decrease of nearly 50% compared to mid-March. The latest factory inventory was 44,000 tons, at an extremely low level. In May, the proportion of domestic molten aluminum was close to 75%, the highest level in the same period of history. The weekly inventory of the Shanghai Futures Exchange was over 110,000 tons, a decrease of more than 50% compared with the annual peak. On the overseas market, LME aluminum inventories have been on a continuous decline since late May last year. As of June 17th, the inventory was 347,000 tons, a decrease of more than 45% within the year. Currently, LME aluminum inventories in North America and Europe are almost exhausted, and the premium and discount rates of LME aluminum (0-3) and LME aluminum (3-15) are simultaneously rising. Among them, (0-3) has turned to a slight premium.
Iv. Summary
Based on the above analysis, considering the recent macroeconomic situation, aluminum supply and demand, and inventory factors, the probability of aluminum prices continuing the medium-term rebound remains relatively high. Moreover, the rapid rebound in crude oil prices recently has further enhanced the price elasticity of aluminum.
