China Securities Co.,Ltd.: Profit of electrolytic aluminum hits bottom and rebounds, consumption outlook has upward elasticity.

China Securities Co., Ltd. released a research report stating that the early production of new projects is the main driver behind the return of aluminum prices to fundamentals. Despite the decline in aluminum prices dragging down aluminum prices, more than 60% of aluminum plants operating at a loss have limited the downward space for aluminum prices, which means that the profitability of electrolytic aluminum has bottomed out and is recovering. With the global aluminum supply growth rate in 2025 only 1.6%, and against the backdrop of loose monetary policy and active fiscal stimulus, consumption has significant upward potential. The upward trend of aluminum prices can be expected, and it is recommended to seize the current opportunity for profit reversal to invest in related targets. Key points from China Securities Co., Ltd.: Industrial metals: The price changes of LME copper, aluminum, lead, zinc, and tin for the week (December 30, 2024 - January 5, 2025) were -1.0%, -2.5%, -2.3%, -4.9%, 0.3% respectively; Industrial metal prices are determined by both financial and commodity attributes. From a financial perspective, the Federal Reserve has launched an interest rate cutting cycle. From a commodity perspective, global copper and aluminum inventories are at relatively low levels, with expectations of Chinese economic recovery and the stimulus from the new energy industry leading to a significant growth in copper and aluminum demand. Confirmation of the downward trend in aluminum oxide, and the bottoming out of electrolytic aluminum profits (1) The defense line of aluminum oxide spot has been breached. For the week (December 30, 2024 - January 5, 2025), multiple low-priced aluminum oxide transactions occurred in China, highlighting the willingness of holders to sell, with the spot price falling below 5300 yuan/ton. The decline in spot prices means that this round of strong aluminum oxide has breached the final defense line and is returning to fundamentals. Overseas, with Rio Tinto resuming production of 1 million tons of aluminum oxide, Vedanta climbing to 1.5 million tons, Indonesia's Memwapah reaching 1 million tons two months ahead of schedule, and Indonesia's Jinjiang starting production of 1 million tons ahead of schedule, all contributing to the return of aluminum oxide prices to fundamentals. (2) Accumulative growth in electrolytic aluminum demand from January to November was 5.3%. From January to November 2024, China's cumulative output of electrolytic aluminum was 39.59 million tons, an increase of 3.8% year on year. Net aluminum imports from January to November totaled 1.87 million tons, an increase of 640,000 tons year on year. Taking into account inventory changes of (aluminum rods + aluminum ingots), domestic aluminum demand from January to November reached 41.3 million tons, an increase of 2.07 million tons year on year, a growth of 5.3%, with contributions from construction -4.1%, transportation 1.7%, electricity 4.3%, exports 1.8%, durable goods 0.7%, packaging 0.6%, machinery and others 0.3%. (3) The profits of the electrolytic aluminum industry turned negative in December. Due to the continued rise in aluminum oxide prices in December 2024, the costs of electrolytic aluminum surged. Since December, the industry's after-tax profits have decreased by 1140 yuan/ton for self-supplied electricity and 205 yuan/ton for grid electricity, a decrease of 1265 yuan/ton and 1475 yuan/ton respectively from November. Since October, aluminum oxide prices have increased by about 1362 yuan/ton compared to Q3, while the after-tax profits of electrolytic aluminum have fallen by 1500 yuan/ton and 1595 yuan/ton to 1044 yuan/ton and 260 yuan/ton respectively compared to Q3. (4) Summary and outlook: Industry-wide losses have limited the decline in aluminum prices, the downward trend in aluminum oxide has been confirmed, and the profits of electrolytic aluminum have bottomed out and are rebounding. With aluminum oxide at 5750, an average grid electricity price of 0.46, and aluminum at 20,000, the total cost of electrolytic aluminum has exceeded 1285 yuan, meaning that high-cost capacity operating at a price of 0.56 is incurring cash flow losses of over 1000 yuan/ton. The losses are limiting the decline in aluminum prices. With global supply growth expected to be 1.6% in 2025 and consumption growth at 2.1%, the gap will drive aluminum prices to pick up. As the profits of the aluminum industry are reversing at present, it is a good time to invest in related targets. Risk warning: 1. A sharp global economic recession leads to a massive contraction in consumption. The World Bank's latest "Global Economic Outlook" predicts a global GDP growth rate of 2.6% in 2024 and 2.7% in 2025. The institution believes that with inflation slowing and growth stabilizing, the global economy is moving towards a soft landing, but risks remain. Economic data in Europe and the US is showing a downward trend, and a deep recession would have a huge impact on the consumption of non-ferrous metals. 2. Uncontrolled inflation in the United States, tighter-than-expected monetary policy from the Federal Reserve, and a strong US dollar suppressing equity asset prices. The United States is unable to effectively control inflation and continues to raise interest rates. The Federal Reserve has carried out a significant series of consecutive interest rate hikes, but service sectors, especially rent and wages, have shown sticky resistance to the fall in inflation. If the Federal Reserve maintains a high-intensity interest rate hike, it is unfavorable for non-ferrous metals priced in US dollars. 3. The consumption growth of the domestic new energy sector falls short of expectations, while the continuous low consumption in the real estate sector persists. Although policies on the sales side of real estate have been relaxed to varying degrees, the lack of willingness of residents to buy and the difficulties in resolving debt risks for real estate companies limit progress. If sales do not improve, the latter stages of real estate completion may face risks of stagnation, which is not favorable for the consumption of some non-ferrous metals in China.