Recently, during the Federal Reserve's interest rate meeting, the aluminum futures prices at Shanghai Futures Exchange (SHFE) delivered an impressive performance. The day before the meeting, SHFE aluminum was the first among non-ferrous metals to rise against the broader trend; after the decision to hold rates steady was announced, SHFE aluminum once again led the gains, outperforming LME aluminum. The price rally was accompanied by a significant expansion in trading volume, with concentrated inflows of long positions, and behind this capital allocation lies the continuous improvement in domestic supply and demand.
Aluminum leads the pack
With the Fed's decision uncertain and market views split, capital moved early to build sizable positions in aluminum within the non-ferrous complex. This was fundamentally a bet on uncertainty itself, rather than a directional call. Other base metals remain heavily dependent on a single meeting outcome, leaving directional bets with little hedge and symmetrical risk exposure. Aluminum, however, stands apart as it carries independent price support logic under either scenario, making it a more compelling hedge against policy uncertainty.
If a rate hike were delivered, the justification would most likely remain the inflation persistence repeatedly emphasized by officials, and a core disruptor of inflation is the Middle East situation and oil prices. This means the macro backdrop supporting a hawkish call inherently corresponds to elevated geopolitical risks in the Middle East, where remaining operational aluminum capacity continues to be exposed to risk, keeping supply chains naturally strained and allowing aluminum prices to command a supply-side premium independent of tightening policy.
If rates were held steady, a recovery in risk appetite would lift the entire complex, while aluminum's own fundamentals, low inventories and tight spots availability, would also absorb inflows, driving a resonant rally alongside the sector.
Therefore, aluminum offers independent upside logic under two mutually exclusive outcomes, making it a preferred vehicle offering both upside elasticity and downside support.
SHFE outshines LME
After the decision landed, SHFE aluminum notably outperformed LME aluminum. The core reason was not simply capital following overseas risk sentiment, but a substantive divergence in trading logics between the domestic and overseas markets. Overseas traders priced in expectations of supply disruption recovery, while domestic traders priced in an expected shift from weakening to tightening fundamentals.
On the overseas side, as some Middle Eastern aluminum producers gradually resumed production, concerns over supply shortages triggered by geopolitical conflict eased progressively. The market began to revise its pessimistic supply outlook, and the LME aluminum price accordingly moved with a weaker bias.
On the domestic side, the bulk of capacity additions in the first half had already been released, with limited room for new supply in the second half. Meanwhile, inventory drawdowns continued through the traditional off-season, and the spots availability kept tightening, with the market increasingly front-running pricing for peak-season demand.
With both supply and demand resonating, the domestic fundamentals are expected to gradually tighten. These divergent expectations drove SHFE aluminum's outperformance over LME aluminum. Ultimately, the trajectory of domestic fundamentals remains the core variable determining whether aluminum prices can sustain their rally.
Supply hits a ceiling
Annual aluminum supply growth was concentrated in the first half. According to Mysteel's data, as of June, operating capacity reached 45.31 million tonnes, up 622,300 tonnes from year-end 2025. By July, newly commissioned and restarted capacities in Northwest and North China had largely approached full production, meaning the incremental space had been exhausted. Subsequent capacity changes will primarily involve replacements rather than net additions, shifting supply from a sustained ramp-up phase to a stable plateau.
As supply stabilizes, demand exhibits structural divergence. Mysteel's data shows that overall output of primary aluminum-based semis products did not decline seasonally but underwent notable internal shifts. On one hand, high temperatures and the traditional off-season weighed on demand from conventional sectors such as construction and packaging. Operating rates at construction profile, aluminum sheet, strip, and foil enterprises came under pressure, with output of cast-rolled coils and slab ingots also retreating.
On the other hand, aluminum demand from emerging sectors including new energy vehicles (NEVs), energy storage, and power cables remained robust, keeping output of aluminum bars and rods stable or even slightly growing. Current output stability is better characterized as a transitional outcome of old and new growth drivers shifting between each other rather than a genuine demand peak. As the market gradually enters the traditional peak season, demand from construction, packaging, and other sectors is expected to recover seasonally, compounded by sustained growth in emerging areas, potentially driving another round of output expansion across fabricators.
Stocks keep falling
China's traders' inventories of aluminum entered a drawdown cycle starting in May this year, but the destocking rhythm diverged markedly from historical patterns. Historically, rapid drawdowns typically begin in March-April and then decelerate month by month, with momentum largely exhausted or even reversing to builds by July-August.
In contrast, the 2026 drawdown started later in May, yet the pace did not slow as expected; instead, it accelerated month by month. The weekly average drawdown in July reached 54,800 tonnes, the highest level for the same period in three years. This delayed yet accelerating drawdown points to the combined effect of supply-side rigid constraints and demand-side support. That the drawdown pace is strengthening even during the traditional off-season suggests the underlying drivers possess considerable sustainability.
Therefore, Mysteel believes that the aluminum ingot destocking trend is likely to persist. On one hand, the ongoing acceleration has already validated the narrative of supply rigidity and demand growth; on the other hand, as the traditional peak consumption season approaches, demand is poised to provide incremental momentum for further drawdowns. Mysteel believes that domestic traders' inventories of aluminum could extend their drawdown through the second half and potentially fall below 800,000 tonnes once again.
Why the rally has legs
In summary, the convergence of stable supply, marginally improving demand, and continuous inventory drawdowns will drive further tightening of domestic fundamentals, providing solid support for higher aluminum prices. It is worth emphasizing that even when aluminum prices experienced sharp corrections earlier, Mysteel maintained an optimistic outlook, believing that supply rigidity coupled with demand resilience would drive continued improvement in domestic fundamentals. SHFE aluminum's recent performance leading gains against the trend during the Fed decision window and outperforming LME aluminum further strengthens our confidence in aluminum's upward trajectory ahead.
Written by Regina WANG
wangjiaqie@mysteel.com
