After the Spring Festival holiday, driven by the improvement of the macroeconomic sentiment, the premium of overseas geopolitical risks, and the de-accumulation of LME inventories, the main contract of aluminum futures on the Shanghai Futures Exchange rose. As of yesterday's closing, it was priced at 24,465 yuan per ton. However, the high domestic inventory pressure and the relatively slow resumption of production by the downstream industries posed dual constraints, limiting the upward potential of aluminum futures on the Shanghai Futures Exchange.
Geopolitical premium: Supply threat resonates with low inventory
The Middle East is a significant production area for electrolytic aluminum globally. Six countries including Iran, the United Arab Emirates, and Saudi Arabia collectively have over 7 million tons of electrolytic aluminum production capacity. However, these countries are highly dependent on imported alumina, with a total annual shortage of approximately 9 million tons. Take Iran as an example, behind its nearly 800,000 tons of electrolytic aluminum production capacity is only 250,000 tons of domestic alumina supply. Each year, it needs to import over 1 million tons to maintain production. After the escalation of conflicts in the Middle East spreads to the Strait of Hormuz, it will cause a two-way supply shock where raw materials cannot enter and products cannot leave. Currently, global electrolytic aluminum inventories are at a low level, and the market has very limited buffer space for supply disruptions. Any supply shock will be magnified, and it will pose a strong upward driving force on aluminum prices.
It is expected that domestic electrolytic aluminum production in March will increase both year-on-year and month-on-month.
In February, the operating capacity of domestic electrolytic aluminum continued to increase. Projects for technological renovation and new construction in regions such as Xinjiang and Inner Mongolia were steadily ramping up production. According to SMM data, as of February 26th, the operating capacity of domestic electrolytic aluminum was 4491.6 million tons, with an industry operating rate of 97.6%. Due to factors such as fewer natural days in February and weakened downstream demand during the Spring Festival holiday, the output of electrolytic aluminum in that month was 3.46 million tons, an increase of 3.6% year-on-year and a decline of 8.91% month-on-month.
In terms of inventory, since February, the social inventory of aluminum ingots in the domestic market has shown a cumulative trend. This is mainly influenced by three factors: supply release, delayed demand, and logistics blockages. From the supply side, the concentrated holiday of downstream processing enterprises led to a significant 7.69 percentage point decrease in the proportion of aluminum liquid in February, reaching 64.37%. The monthly casting output increased by approximately 170,000 tons compared to the previous month. From the demand side, the progress of downstream resumption of work after the Spring Festival was less than expected, and the digestion speed of aluminum ingots was slow. Downstream purchases were mainly based on necessity and there was a strong sense of hesitation. From the logistics side, the recovery of logistics capacity after the holiday lagged, causing the warehouse capacity in major consumption areas to be in an emergency state. A large amount of aluminum ingots were piled up at railway platforms, which further exacerbated the market's expectation of supply pressure. According to SMM data, as of March 2nd, the domestic social inventory of electrolytic aluminum has risen to 122.9 million tons, an increase of 33.7 million tons compared to before the holiday.
Later, as the downstream industries fully resumed production, the aluminum production entered the traditional peak season of "Golden March and Silver April". SMM predicts that the domestic electrolytic aluminum output in March will be 3.819 million tons, increasing by 10.38% compared with the previous month and growing by 6.65% year-on-year. The proportion of aluminum ingots is expected to increase by approximately 9.1 percentage points compared to February; the peak of aluminum ingot inventory may reach 1.35 million to 1.40 million tons, and the inventory turning point may occur in the middle to late March.
Profit resilience under supply rigidity
In February, the domestic electrolytic aluminum industry witnessed a slight decrease in costs, a decline in prices, and a slight drop in profits. According to SMM data, the average cost of the domestic electrolytic aluminum industry in February was 16,227.28 yuan per ton, increasing by 4.37% compared with the previous month. Among the cost components, the cost of alumina decreased by 0.8% compared with the previous month due to the industry's overcapacity, reaching 5,056.67 yuan per ton; the cost of electricity increased by 2.84% compared with the previous month due to the southwestern water shortage period, reaching 5,834.91 yuan per ton. Due to the cooling of macroeconomic sentiment and the weakening of industry supply and demand, the average price of electrolytic aluminum in February dropped by 2.91% compared with the previous month, reaching 23,385 yuan per ton, which pushed the average profit of the industry down by 9.72% to 7,157.72 yuan per ton.
This situation has led to a significant profit disparity within the aluminum industry chain: The electrolytic aluminum sector enjoys substantial profits, while the upstream alumina industry is struggling around the cost line. The electrolytic aluminum sector is constrained by a rigid 45 million ton capacity ceiling and has pricing power, while the alumina sector is facing an oversupply situation. The sustainability of the high profits in the electrolytic aluminum sector is under scrutiny in the future: On one hand, the high aluminum prices have suppressed downstream demand, leading to inventory accumulation; on the other hand, part of the profits are attributed to the decline in alumina prices. If the reduction in production scale or price rebound at the raw material end occurs, costs may rise. However, given the long-term existence of supply rigidity, it is expected that the aluminum industry will maintain high profits in the first half of the year.
Real estate reality vs. automotive expectations
From the perspective of terminal demand, the two major aluminum-using sectors - real estate and automobiles - have shown different performances. In the real estate sector, in February, the industry was in a traditional off-season, with the market presenting a differentiated feature of weak new home sales and stable second-hand home sales. However, the policy side continued to exert efforts, providing support for the market. For aluminum consumption, the weak new home market directly dampened the demand for building profiles. Processing enterprises in South China generally postponed their resumption of work until the first half of March. But the active second-hand home market and the recovery of land auctions in core cities indicated that the subsequent completion and improvement-type demand was expected to gradually be released.
In terms of automobiles, although facing short-term pressure, the policy package has provided support for the entire year. The China Association of Automobile Manufacturers predicts that the total vehicle sales in 2026 will reach 34.75 million units, potentially setting a new record high. With the release of policy effects and the recovery of confidence, the automotive market is expected to stabilize and recover after the first quarter.
Currently, the aluminum market is characterized by the interweaving of both bullish and bearish factors. Geopolitical risks dominate the short-term sentiment, while the fundamentals show a pattern of being weak domestically but strong externally. On the positive side, the escalation of the regional conflict in the Middle East has become the core driver in recent times, coupled with the continuous intensification of supply disruptions overseas - the 580,000-ton capacity of the electrolytic aluminum plant in Mozambique is expected to be shut down, and the inventory reduction at the LME also provides support for the aluminum prices on the foreign market. Domestically, after the holidays, aluminum downstream enterprises have resumed production one after another, and the traditional peak season of "March and April" is approaching, which has led to an increase in the market's bullish expectations; the negative factors mainly lie in the fundamentals. The social inventory of electrolytic aluminum has reached a high level for the same period in recent years, the recovery of demand is relatively slow, while the supply side is steadily increasing. The increase in production days in March will drive the output to further grow.
Overall, driven by both the geopolitical risk premium and the domestic peak season expectations, the aluminum price is expected to break free from the suppression of weak reality. In the short term, the price of Shanghai aluminum is likely to maintain a volatile but upward trend. In the future, the key focus will be on the progress of downstream resumption of production and the turning point of inventory.
