According to Futures Daily, aluminum prices previously experienced a sharp decline; the SHFE aluminum benchmark contract plunged rapidly from 24,500 RMB/ton in June to a year-to-date low of 22,245 RMB/ton on July 1. During the same period, the LME 3-month aluminum price retreated from above $3,700/ton to the $3,000/ton level, a drop of nearly 20%. Since July 2, aluminum prices have staged a rebound following the oversold conditions, with the SHFE benchmark contract recovering to the 23,000 RMB/ton level.
Macro and Geopolitical Factors Converged to Drive Earlier Price Slump
The earlier deep slump in aluminum prices was essentially the result of a convergence between expectations of tightening macro liquidity and the dissipation of the geopolitical risk premium associated with the Middle East. U.S. non-farm payroll data for May exceeded expectations, and combined with hawkish signals from several Federal Reserve policymakers, market expectations for interest rate hikes within the year intensified. The U.S. Dollar Index climbed back above the 100 mark—hitting a year-to-date high—and U.S. Treasury yields rose; this placed the dollar-denominated non-ferrous metals sector under pressure, creating the macro backdrop for the decline in aluminum prices.
On the geopolitical front, the signing of a 60-day ceasefire memorandum of understanding (MOU) between the U.S. and Iran in mid-June marked a pivotal turning point for the market. The signing of the MOU dispelled concerns regarding aluminum supplies, leading to a rapid unwinding of the geopolitical risk premium that had previously been priced into aluminum. Market expectations that shipping through the Strait of Hormuz would resume, that halted Middle Eastern electrolytic aluminum capacity would gradually restart, and that the global supply gap would be filled further accelerated the downward trend in prices.
However, entering July, U.S. ADP and non-farm payroll data showed signs of weakening, and Fed Chair Warsh made dovish remarks. Consequently, market concerns regarding aggressive rate hikes cooled, and overall sentiment in the commodities market improved. Building on the earlier oversold state, aluminum prices underwent a recovery driven by improved liquidity expectations. Recovery of Electrolytic Aluminum Capacity in the Middle East Will Take Time
Although the aluminum supply situation has moved past its most critical phase, uncertainties remain. Shipping traffic through the Strait of Hormuz is recovering slowly. Shipping agency data indicates that in early July, the daily volume of merchant vessels escorted by the U.S. remained far below the pre-conflict average of over 100 ships per day. Iran continues to implement routine waterway controls; combined with the risks of regional sea mines and satellite navigation interference, the threat level across the Strait remains high. While shipping insurance rates have retreated from their peak to 2%, this figure is still 20 times higher than in a normal year.
Furthermore, the recovery cycle for electrolytic aluminum capacity is lengthy, making it difficult to quickly bridge the supply gap. The recent conflict has caused the suspension of over 2.3 million tons per year of electrolytic aluminum capacity in the Middle East, representing 3% of global capacity. Although Emirates Global Aluminium (EGA) restarted some electrolytic cells at its Al Taweelah plant on May 26, these cells require precise parameter adjustments and a gradual stabilization process to reach steady-state production. The plant estimates it will take up to a year for capacity to return to pre-conflict levels.
Domestic Fundamentals: A Mix of Bullish and Bearish Factors
In June, domestic electrolytic aluminum production rose 2.2% year-on-year, with overall operations remaining stable. Capacity utilization approached 99% during this period, leaving limited room for supply growth. Additionally, as of early July, the national average full cost of production stood at 16,267 RMB/ton; with industry profits exceeding 6,000 RMB/ton, enterprises remain highly motivated to produce.
Meanwhile, aluminum demand has entered the traditional off-season. According to SMM data, the average operating rate of leading downstream aluminum enterprises fell to 62.6% by July 3. As the price spread between domestic and international markets narrows, the scope for export arbitrage has also been compressed. With overseas restocking demand largely realized and a marginal recovery in Middle Eastern supply, the growth rate of my country's aluminum product exports is likely to slow in the second half of the year. Although aluminum ingot inventories fell from a year-to-date peak of 1.456 million tons in May to 1.098 million tons on July 6, absolute inventory levels remain high for this time of year—exceeding the average for the same period (June) between 2021 and 2025 by approximately 60%. Overall, inventory levels are unlikely to drive aluminum prices upward.
Market Outlook
With the new Federal Reserve Chair, Kevin Warsh, assuming office and the Fed entering a period of policy framework adjustment—compounded by frequent volatility in employment data, inflation figures, and geopolitical events—expectations regarding interest rates and geopolitical risk premiums will undergo frequent revisions. From a macroeconomic perspective, conditions do not support a sustained, one-way trend in the commodities market. Regarding the aluminum market specifically, a supply deficit is highly probable, though the pace at which this gap is filled remains highly uncertain. While supply pressures have eased somewhat compared to the supply crisis seen in the first half of the year, there are no significant bullish factors on the supply side for the next one to two months. In the medium to long term, however, aluminum demand from emerging sectors—such as new energy vehicles, photovoltaics, energy storage, and AI infrastructure—continues to rise. Given constraints on new global capacity and supply rigidity, the core value proposition of aluminum remains solid, suggesting that prices will maintain a trend of being "prone to rising but resistant to falling."
In summary, the SHFE aluminum benchmark contract has room for upside in the short term, driven by a recovery in macroeconomic sentiment and a technical rebound following oversold conditions. Once the rebound momentum dissipates, supply-demand fundamentals will regain control of market trends, leading to weak, range-bound price action. The coming one to two months are expected to be a period of relative weakness for aluminum prices. During this time, attention should be paid to US-Iran negotiations; if successful, suspended production capacity in the Middle East could gradually come back online, narrowing the global supply deficit and further suppressing prices. Nevertheless, in the medium to long term, demand-side support ensures that aluminum prices remain "prone to rising but resistant to falling."
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