The second quarter of 2026 saw a modest increase in the average price of primary aluminum. This was driven by a confluence of factors, including geopolitical tensions in the Middle East, shifts in expectations for U.S. Federal Reserve monetary policy, and continued drawdowns in physical aluminum ingot inventories. Looking ahead to the third quarter, demand is anticipated to follow a pattern of initial weakness followed by strength, which is expected to lead to a monthly average price trajectory that declines first before rising.

Price Review: Q2 Sees High but Narrow Range with a Slight Average Gain

According to market data, the average spot price for A00 aluminum in the second quarter was 24,242.33 yuan per ton. This represents an increase of 0.89% compared to the first quarter of last year and a significant 20.03% rise compared to the second quarter of last year. Within the quarter, the highest price reached 25,160 yuan per ton on April 17th, while the lowest was 22,500 yuan per ton on June 30th, resulting in a price amplitude of 2,660 yuan per ton. The key drivers were as follows.

Q2 Pressures: Middle East Disruptions and Fed Expectations Weigh on Prices

In the first half of April, aluminum prices strengthened, supported by expectations of tight overseas supply. However, prices peaked and then retreated in the latter half of the month amid fluctuating negotiations and a stronger U.S. dollar. An attack on Emirates Global Aluminium at the end of March heightened concerns over supply contraction due to damaged overseas capacity and shipping disruptions in the Strait of Hormuz, supporting price gains. Temporary ceasefire talks between the U.S. and Iran began on April 8th, briefly reopening the strait. While some geopolitical premium was digested, falling oil prices eased U.S. inflation expectations, weakening the dollar index to around 98 and triggering a broad rebound in non-ferrous metals in early April. Later in the month, U.S.-Iran talks stalled, shipping was restricted again, and a hawkish tone from the Fed's late-April meeting cooled rate cut expectations. The dollar shifted from weakness to a slight gain, market sentiment turned bearish, and aluminum prices retreated from their highs.

Throughout May, U.S.-Iran negotiations seesawed without substantive progress. Early in the month, the announcement of a shift in U.S. strategy temporarily boosted market risk appetite. However, serious disagreements on issues like uranium enrichment and frozen assets persisted, preventing a full restoration of shipping volumes through the Strait of Hormuz. Concerns about inflation continued to weigh on risk assets. During this period, the release of April CPI data from major economies showed U.S. inflation exceeding expectations while non-farm payrolls remained robust. In contrast, CPI data from the Eurozone, UK, and Japan came in below or in line with forecasts. This led markets to anticipate a more hawkish Fed and a stronger dollar, putting downward pressure on aluminum prices.

In June, the signing of a U.S.-Iran memorandum and hawkish commentary from Fed officials led to a continued downward shift in aluminum's price center. The easing of tensions and the reopening of the Strait of Hormuz created expectations for the release of previously stranded aluminum stocks and the restart of idled Middle Eastern capacity, causing the geopolitical risk premium to evaporate rapidly. Concurrently, hawkish signals from Federal Reserve officials at a European Central Bank forum reinforced expectations for U.S. rate hikes within the year. The U.S. dollar strengthened persistently, reaching near one-year highs and oscillating around 100, pressuring the broader non-ferrous metals market and leading to a pullback in both domestic and international aluminum prices.

Given the significant macro headwinds in Q2, how did the fundamental supply and demand picture perform?

Supply and Demand: Steady Supply Growth Meets Demand Stimulated by Lower Prices, Accelerating Inventory Drawdowns

Firstly, aluminum smelter supply remained healthy with operating rates staying high. Data shows that by the end of June, China's total primary aluminum capacity reached 45.53 million tons, with operating capacity at 44.45 million tons, representing an operating rate of 97.81%. This was a 0.33 percentage point increase from March. Total primary aluminum output in Q2 was 11.0466 million tons, an increase of 197,400 tons or 1.82% from the previous quarter, indicating stable, slightly growing supply.

Secondly, as aluminum prices weakened, downstream manufacturers increased their restocking. April, typically a peak season, saw high prices that suppressed downstream demand. However, as prices fell in May and June, end-user orders improved, and processing plants became more willing to restock. Overall demand exhibited a pattern of being stronger than expected in the off-season and weaker than expected in the peak season.

Thirdly, social inventories of aluminum ingots drew down in Q2. As prices gradually fell below 24,500 yuan per ton in May, social inventories reached an inflection point and began to decline in early May—about a month later than the same period last year—after peaking near 1.4 million tons. By the end of June, inventories across five major regions stood at 1.139 million tons. This was a decrease of 136,000 tons, or 10.67%, from the end of Q1, but an increase of 715,000 tons, or 168.63%, compared to the same period last year. Besides lower prices stimulating downstream purchasing, the drawdown was closely linked to changes in the proportion of molten aluminum used directly by fabricators versus being cast into ingots. Data indicates the molten aluminum ratio was 74.6%, 76.1%, and 77.10% from April to June, respectively, gradually increasing throughout Q2 and slightly above last year's levels, resulting in reduced ingot production.

Profitability: High Prices and Controlled Costs Expand Smelter Margins

Industry data shows the average production cost for primary aluminum in Q2 was 15,941.08 yuan per ton, up 1.44% quarter-on-quarter but down 3.02% year-on-year. The industry's average quarterly profit reached 8,261.05 yuan per ton, marking a slight 0.18% increase from the previous quarter and a substantial 120.40% surge year-on-year. While smelter profits increased, production costs also edged up slightly, primarily due to a modest rise in alumina prices. However, the increase was limited. The average domestic spot price for alumina in Q2 was 2,709.08 yuan per ton, up 1.96% quarter-on-quarter but down 12.63% year-on-year.

In summary, the second quarter saw a mix of bullish and bearish factors from both macro and fundamental perspectives, leading aluminum prices to trade under pressure at elevated levels with a slight increase in the average price. Since the start of July, prices have rebounded from a low of 22,260 yuan per ton to fluctuate around 23,000 yuan per ton. This was driven by weaker-than-expected U.S. non-farm payrolls data, which reduced Fed hike probabilities, coupled with renewed U.S. military strikes against Iran and the closure of the Strait of Hormuz, which revived the geopolitical risk premium. As of July 16th, the domestic spot aluminum price averaged 23,170 yuan per ton, up 910 yuan or 4.09% from the beginning of the month. Considering the current macro environment, supply-demand fluctuations, and seasonal patterns, the monthly average aluminum price in the third quarter is projected to decline initially before rising.

Macro Outlook: Middle East and Fed Policy Remain Key Variables

Geopolitical shifts in the Middle East and changes in Federal Reserve policy are the primary variables influencing the primary aluminum market. The recent resurgence of U.S.-Iran conflict has nullified the previous temporary ceasefire, with both sides targeting each other's assets, significantly increasing shipping risks in the Strait of Hormuz and creating strong short-term uncertainty. Idled primary aluminum capacity in the Middle East stands at 2.35-2.50 million tons, with restart cycles typically lasting 6-12 months, making large-scale resumption unlikely within Q3. Continued restrictions on strait transit are keeping logistics costs high for alumina imports and aluminum exports. Additionally, elevated oil prices are pushing up power and prebaked anode costs. On the inventory front, LME aluminum stocks have fallen to an extremely low level of around 280,000 tons, and this tight inventory structure enhances price support at lower levels. Currently, the Fed's maintained hawkish stance and a strong U.S. dollar index may continue to pressure aluminum prices in Q3. The upcoming September Fed meeting will provide updated economic projections and interest rate forecasts. A hawkish signal could further pressure valuations across the non-ferrous metals sector, while a dovish tilt could support price gains. Overall, while macro uncertainty remains high, the underlying tight overseas supply situation persists, providing a floor for aluminum prices.

Fundamental Outlook: Demand Expected to Rebound After Initial Weakness

On the fundamental side, demand is expected to weaken before strengthening, serving as a key driver for Q3 price movements. Supply is projected to grow modestly, with the increase primarily coming from 1.4 million tons of new capacity in Xinjiang (including 200,000 tons from new quotas, expected to reach full production around late July). On the demand side, the market is transitioning between seasonal patterns, suggesting a trajectory of initial weakness followed by recovery. July and August are traditional consumption off-peak months. Downstream processing plant operating rates typically decline, demand for construction profiles remains weak, and demand for aluminum sheet/plate, foil, and industrial profiles contracts to varying degrees. Consequently, the pace of social inventory drawdowns may slow. As September approaches, marking the start of the traditional peak season, production schedules in end-use sectors like new energy vehicles are expected to pick up, driving downstream restocking demand. Coupled with resilient export performance, social inventories of primary aluminum are likely to resume a faster drawdown. In summary, the main price range for aluminum in Q3 is projected to be 22,000 to 24,800 yuan per ton. The low point is likely to occur during the off-peak months of July-August, with the high point expected in the peak month of September.