SMM

Last week, aluminum prices fluctuated rangebound around 20,300, influenced by expectations of weakening demand. Except for Foshan, spot premiums in Wuxi and Gongyi weakened. In Gongyi, downstream operating rates were affected by environmental protection issues, leading to weaker outflows from warehouses and deeper discounts. However, outflows in Wuxi and Foshan rebounded against the trend, driving domestic outflows to maintain a strong performance. According to SMM statistics, domestic aluminum ingot outflows from warehouses increased by 5,800 mt WoW to 130,900 mt last week, reflecting that year-end restocking demand from downstream sectors has not significantly declined. Additionally, due to the tight circulation in the South China market, downstream buyers showed strong willingness to stockpile at lower prices, with Foshan's outflows increasing by 7,900 mt WoW to 33,800 mt. Since mid-to-late October, Foshan has experienced nearly two months of continuous destocking, with inventory cumulatively decreasing by nearly 100,000 mt.

Why has the South China market maintained stable destocking during the year-end off-season? SMM attributes this to the following reasons:
1. Supply-side pressure eased: Although there were no production cuts in Yunnan in Q4 this year, shipments from Xinjiang to South China declined significantly YoY due to regional price spreads and backlog issues. The proportion of aluminum liquid increased YoY, and the casting ingot and aluminum ingot inflows from neighboring provinces decreased. According to the SMM survey, several aluminum plants in the three southwestern provinces have already exceeded their annual sales targets ahead of schedule, significantly slowing the shipment pace of aluminum ingots.
2. Demand-side diversion: Overall demand in southwest China performed well this year, with Chongqing also entering a continuous destocking phase. Stable outflows in the region diverted some aluminum ingot supplies from Yunnan and other areas.
3. South China primarily focuses on construction extrusions. Some aluminum extrusion plants received rush orders for year-end engineering projects and were concerned about escalating anti-dumping measures, which supported operating rates. Additionally, with the Chinese New Year holiday coming earlier this year, downstream sectors showed intentions to start holidays earlier, further strengthening their willingness to stockpile at lower prices.

According to SMM statistics, as of December 16, 2024, domestic aluminum ingot social inventory stood at 551,000 mt, while the inventory of marketable aluminum ingots was 425,000 mt, down by 6,000 mt from last Thursday. Recently, shipments from Xinjiang have remained stable, and domestic arrivals have been limited due to ongoing long-term contract negotiations. Although shipments to Wuxi increased slightly in transit due to the widening price spread between Henan and Shanghai in the latter part of last week, concentrated arrivals over the weekend led to an inventory buildup of 5,000 mt. However, Gongyi's arrival pressure eased, allowing for a 2,000 mt destocking despite weaker outflows. Foshan destocked 8,000 mt last week, with outflows increasing by nearly 8,000 mt WoW, drawing market attention due to its strong and sustained destocking performance. On a YoY basis, current domestic aluminum ingot inventory is only 68,000 mt higher than the same period last year.

SMM believes that although recent shipments from Xinjiang have slowed, causing fluctuations in domestic aluminum ingot inventory, the backlog in Xinjiang is expected to continue easing. Shipments to Gongyi and Wuxi are anticipated to increase, raising concerns about the pressure and risks of concentrated arrivals. While the year-end inventory buildup turning point has been delayed, the sustainability of off-season aluminum ingot outflows is limited. SMM expects the inventory turning point to emerge around late December, with low inventory providing less support for aluminum prices. SMM forecasts that domestic aluminum ingot inventory will hover around 550,000-650,000 mt in December, with an increasing risk of sustained inventory buildup in mid-to-late December, potentially reaching approximately 600,000 mt. Observations should focus on changes in downstream operating rates before the year-end holidays and whether aluminum price pullbacks continue to drive spot outflows.

This week, aluminum billet inventory and outflows continued to show strong performance. As of December 16, domestic aluminum billet social inventory was 91,500 mt, down by 1,300 mt from last Thursday, according to SMM statistics. In early December, some aluminum billet producers cut production, easing supply-side pressure. Limited arrivals kept inventory below 100,000 mt, allowing for continued destocking. Meanwhile, aluminum billet supply remained tight, delaying the off-season inventory turning point. On a YoY basis, inventory is 9,300 mt higher than the same period last year, still at a three-year high for the same period.

Regarding outflows, aluminum billet outflows increased slightly by 800 mt WoW to 47,600 mt last week. In December, the "rush to export" phase ended. According to the SMM survey, downstream enterprises in South China reported no significant changes in orders and demand compared to late November. Enterprises with export orders had mostly delivered in advance. Feedback indicated that the "rush to export" in South China was not prominent, while extrusion enterprises in East China and plate/sheet, strip, and foil enterprises in central China had a higher export proportion. However, last week's aluminum billet outflows diverged from the weekly operating rate of downstream extrusion enterprises, reflecting that some downstream sectors, despite suppressed operating rates, showed willingness to stockpile at lower prices for year-end restocking.

SMM expects that although aluminum billet operating rates have recently declined and Xinjiang's shipment pace has slowed, reducing domestic arrival pressure, strong outflows have supported inventory performance. However, at the year-end stage, domestic aluminum billets remain in a weak supply-demand balance. Shipments from Xinjiang to Huzhou and other regions are stable, with arrivals expected to increase significantly later, leading to stable or slightly higher inventory levels in December. Observations should focus on changes in downstream operating rates before the year-end holidays and whether aluminum price pullbacks continue to drive spot outflows.

On the demand side for aluminum billets, the weekly operating rate of the domestic aluminum processing industry fell by 1.0 percentage point WoW to 49.80% last week, mainly due to the off-season and the end of export rush orders. By segment, construction extrusions in South China received positive news, with some extrusion plants securing rush orders for year-end engineering projects, supporting operating rates this week. For industrial extrusions, NEV orders remained stable, while PV extrusions weakened significantly due to reduced downstream component production schedules, dragging down industry operating rates. Overall, the off-season sentiment has resurfaced, and domestic aluminum extrusion operating rates are expected to remain weak in the short term.