CITIC SEC: Indonesian project may change the global cost curve of alumina, continuing to be optimistic about investment opportunities in the electrolytic aluminum industry.

CITIC SEC released a research report stating that Indonesia has become a hot spot for global aluminum industry development due to its abundant bauxite and coal resources. The local bauxite mining costs have outstanding advantages, but there is no significant advantage in energy prices. The bank calculated that the return on investment in Indonesian electrolytic aluminum is at a limited level, but the advantages of alumina return should not be underestimated. It is predicted that the annual average increase in Indonesia's alumina/electrolytic aluminum production capacity from 2025 to 2030 will reach 3.2/0.56 million tons. The bank believes that the commissioning of Indonesian projects will not change the trend of declining growth in electrolytic aluminum production, but will change the global alumina cost curve, and continues to be optimistic about investment opportunities in the electrolytic aluminum industry. CITIC SEC's main points are as follows: Resource endowment: Rich bauxite resources, low degree of power grid interconnection, no significant advantage in electricity prices. Indonesia is a major country in bauxite resources, with reserves and production of bauxite ranking fourth and fifth in the world, and coal reserves and production ranking seventh and third globally. Indonesia has a low degree of power grid interconnection and regional balance, and electrolytic aluminum projects rely heavily on self-generated electricity. The pricing of Indonesian coal is highly internationalized, with no significant advantage compared to China in terms of the same calorific value price. Industrial electricity prices in 2024 are 0.49 yuan/kWh, and the comprehensive cost of a new self-generated power plant is 0.55 yuan/kWh, which is not advantageous compared to China. Inventory of projects: It is estimated that the annual average increase in Indonesia's alumina/electrolytic aluminum production capacity from 2025 to 2030 will reach 3.2/0.56 million tons. In terms of alumina, the bank predicts that with the construction and commissioning of projects such as Inalum, Shandong Nanshan Aluminum, Jinjiang Group, Qili Aluminum, and Harita Group, Indonesia's alumina production capacity will increase from 4 million tons per year to 25.2 million tons per year, corresponding to a CAGR of 35.9%, with an average annual increase of 3.2 million tons. In terms of electrolytic aluminum, the bank predicts that with the upgrade of Inalum Kuala Tanjung, the Mempawah project, Huqing Aluminum, Shandong Nanshan Aluminum, Adaro PT KAI, Xinfeng Group's Juman Aluminum, and Taijing Aluminum gradually put into production, Indonesia's electrolytic aluminum production from 2025 to 2030 will reach 0.88/1.8/2.45/2.55/3/3.75 million tons, corresponding to an increase of 0.35/0.93/0.65/0.1/0.45/0.75 million tons. Return calculation: The return on investment in electrolytic aluminum is relatively limited, but the advantages of alumina return should not be underestimated. In terms of alumina, benefiting from tax exemptions and significantly advantageous bauxite costs, at a price of $450 for alumina and current bauxite prices, the cost of domestic bauxite/imported bauxite/Indonesian alumina is $388/417/289 per ton, and the payback period is 8/15/5 years. At a price of $375 for alumina, the payback period for the Indonesian project remains at 8-9 years, while Chinese projects fall into losses. The lucrative returns may drive the accelerated construction of Indonesia's alumina production capacity. In terms of electrolytic aluminum, at prices of $2600/$450 for electrolytic aluminum/alumina, the costs of domestic and Indonesian electrolytic aluminum are $2354/2613 per ton, considering the 279% higher capital expenditure in Indonesia compared to China, the payback periods are 3/12 years. The aluminum price needs to reach $2800-$3000 in order to bring the payback period for Indonesian projects to a better level. Supply outlook: Indonesian projects will not change the trend of declining growth in electrolytic aluminum production, but will alter the global alumina cost curve. The bank predicts that from 2025 to 2030, the global growth rate of electrolytic aluminum production will be 3.2%/1.7%/2.1%/0.9%/0.6%/1.0%. Indonesian electrolytic aluminum projects are unlikely to change the trend of declining growth rate in global production. Compared to electrolytic aluminum, the Indonesian alumina industry has more unique advantages, and project construction may progress more rapidly. The bank predicts that with the commissioning of low-cost production capacity in Indonesia, the cost center of Chinese and Indonesian alumina will move from 3030 yuan/ton to 2840 yuan/ton, the cost curve will change, and the elimination of Shanxi and Henan imported ore production capacity on the right side will accelerate, industry profits will narrow, and companies will need to adjust their costs and profitability competitiveness through relocation and technological improvements to maintain. Risk factors: The risk of Indonesian electrolytic aluminum projects exceeding expectations in construction and commissioning, the risk of Indonesian alumina projects exceeding expectations in construction and commissioning, the risk of a decline in domestic enterprise alumina profit levels, the risk of increased global trade disputes, the risk of unexpected increases in electrolytic aluminum production capacity in other overseas regions, the risk of lower-than-expected downstream demand growth for electrolytic aluminum, the risk of rising global energy costs, and the risk of disruptions in upstream raw material supply.