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Where is the support below the aluminum price?

January 26, 2024
Since the beginning of this year, the main contract price of domestic Shanghai aluminum has continued to decline (the highest was 19,700 yuan/ton last year), and the lowest fell to 18,600 yuan/ton. Recently, aluminum prices rebounded slightly, aluminum prices below the support price where?
The dollar continued to rebound, putting pressure on nonferrous metals
From a macro point of view, after the New Year's Day holiday, the market's expectations of the Federal Reserve's rapid interest rate cut gradually cooled, leading the US dollar index to enter a strong rebound. As the trend of the US dollar index has a significant impact on the price of non-ferrous metals, the overall price of non-ferrous metals came under pressure and fell.
According to the latest data from CME's Fed Watch, there is a 52.9% probability that the Fed will leave rates unchanged in March 2024. In addition, the probability of a cumulative 25 basis point cut is 46.2%, while the probability of a cumulative 50 basis point cut is only 1%. In December 2023, after the Federal Reserve announced the latest interest rate resolution, CME "Fed Watch" data shows that in March 2024, the probability of the Federal Reserve cutting interest rates is as high as 80.8%.
At present, there are two main factors that have caused the market to change the expectation of the Fed rate cut. First, in January 2024, the latest non-farm payrolls data and inflation data released in the United States do not support the Federal Reserve to cut interest rates immediately. Secondly, recently, the Fed has frequently spoken out, stressing that it may be too early to cut interest rates in March 2024, and further attention needs to be paid to changes in the latest economic data in the United States.
To sum up, only when the market's expectation of the Federal Reserve's interest rate cut heats up again, the dollar index may weaken again, thus driving the stabilization and rebound of non-ferrous metal prices.
Aluminum social inventory may be seasonal accumulation
According to SMM statistics, at present, the total social inventory of electrolytic aluminum has declined for two consecutive weeks, which is the lowest level in the same period of nearly 7 years. Compared with the inventory in the same period last year, the gap has widened to 304,000 tons. Last week, the volume of aluminum ingots was 117,300 tons, an increase of 0.24 million tons from the previous month, showing that the strong performance of nearly half a month was continued. The fall in aluminum prices stimulated the market's restocking willingness before the Spring Festival, and the overall arrival of aluminum ingots over the weekend did not increase significantly.
In late January, the domestic aluminum ingot continued to warehouse trend. As the overall physical circulation continues to tighten, the inventory situation looks more positive, which provides support for the recent premium market. Specifically, aluminum ingot inventories in Foshan and Wuxi fell by 0.4 million tons and 0.1 million tons respectively from the previous week. However, the arrival volume of Gongyi has been supplemented, affected by weather and other factors, the delivery performance has been slightly weaker, resulting in an increase of 6,000 tons of inventory.
In late January, due to the lower operating rate of downstream industries before the Spring Festival and the expected decline in the ratio of aluminum to water, the domestic aluminum ingot inventory may enter the seasonal accumulation stage. According to SMM forecasts, by the end of January, the total domestic aluminum ingot social inventory may reach 500,000 to 550,000 tons.
Although the current social inventory of aluminum ingots is at a low level, from the point of view of time, the aluminum industry is about to enter the seasonal accumulation stage, which may weaken the support for aluminum prices. Therefore, while aluminum prices may be supported by low inventories in the short term, the long-term trend still needs to pay attention to the global economic situation, the direction of policy and the change in market sentiment.
Before the Spring Festival, market funds were cautious overall
From the perspective of funds, the amount of funds in the Shanghai aluminum market as a whole showed an outflow trend, and the total position of futures contracts in each month fell from 520,000 lots to a minimum of 426,000 lots. The specific position shows that from January 2 to 22, 2024, the net long position of Shanghai aluminum basically reduced and left the market. New entrants to the list have also recently shown signs of reducing their net long positions. Taking into account that there will be a round of outflows of market funds before the Spring Festival holiday, therefore, from a capital point of view, the current does not support a significant rebound in Shanghai aluminum prices.
On the whole, before the Spring Festival, from the macro side, fundamentals to the financial side, are not very supportive of aluminum prices into a new round of upward trend. The future still needs to watch the global economic situation, policy direction and market sentiment changes.