Nonferrous Metals Industry Report simplified version: the epidemic situation in Guangxi further disturbed the supply side of electrolytic aluminum, and low inventory supported the upward rise of aluminum price

Incident: there was an outbreak in Baise, Guangxi. On February 7, the local government decided to take all staff home isolation and control measures for the whole city. Disturbed by the epidemic, as of February 8, the spot price of non-ferrous aluminum in the Yangtze River rose by 3.88% compared with that before the festival and 11.79% compared with that at the beginning of the year.

China’s supply disturbance: Guangxi Baise epidemic control measures are upgraded, and the plan to stop the production capacity of 500000 tons may disturb the aluminum supply side. The tight supply continues to promote the rise of aluminum prices. On the one hand, the access of personnel in Baise is strictly controlled, which puts great pressure on the production of local aluminum plants. On the other hand, the epidemic control has put great pressure on the transportation of raw materials. As Baise is the main alumina production place in China, the alumina inventory of local aluminum plants is low, generally 7-10 days. However, due to the raw material constraints brought about by the epidemic control, some aluminum factories successively plan to reduce production and stop production. In terms of production capacity, the completed production capacity of Guangxi Province is about 2.815 million tons, of which the completed production capacity of electrolytic aluminum in Baise region of Guangxi reaches 2.315 million tons, accounting for 82.2% of the whole province. Further, according to SMM data, the planned shutdown capacity in the city may be about 500000 tons. The epidemic situation in Baise city is expected to be difficult to recover in the short term. If the epidemic situation worsens further, the possibility of full shutdown cannot be ruled out, and China’s electrolytic aluminum supply may be further under pressure.

Disturbance of overseas supply: the European energy crisis is difficult to ease, and the situation in Russia and Ukraine may exacerbate the tide of aluminum plant closures. Since the summer of 21 years, the energy problem in Europe has become increasingly serious. The energy shortage has led to the surge of electricity charges in Europe, and the proportion of electricity costs in aluminum production costs has gradually increased. The commodity attribute of aluminum makes the global aluminum price not reflect the impact of soaring electricity prices in Europe, resulting in the passive reduction of production of European aluminum plants. According to Shanghai Aladdin Biochemical Technology Co.Ltd(688179) data, since October 21, the annual capacity loss of electrolytic aluminum in Europe has exceeded 650000 tons. With the gradual tension between Russia and Ukraine, it is difficult to alleviate the energy problem in the short term, or it will enhance the possibility of reducing and stopping production of European aluminum plants. The global electrolytic aluminum supply side is under further pressure.

In terms of inventory: during the Spring Festival, the cumulative inventory range is at a low level over the years, and low inventory supports the upward trend of aluminum price. On the Chinese side, affected by the continuous power restriction policy, China’s electrolytic aluminum inventory continued to go to the warehouse. Before the festival, China’s social inventory of aluminum ingots was 726000 tons, at a historical low; In addition, during the Spring Festival, China’s electrolytic aluminum inventory increased by 140000 tons, an increase of 19.4% compared with that before the festival, an increase of 18.0% compared with the inventory four weeks before the Spring Festival. Overseas, thanks to the gradual control of the global epidemic, LME inventory continued the trend of destocking for 21 years. As of February 7, LME inventory was 768300 tons, the lowest level since 2016.

In terms of demand: “steady growth” and the expectation of consumption recovery after the festival boosted the market’s expectation of aluminum demand. On the one hand, in the context of China’s “steady growth”, infrastructure investment is moderately ahead of schedule, ensuring the demand for aluminum in traditional fields. In addition, the market is optimistic about the recovery of aluminum consumption after the Spring Festival. Under the insufficient supply elasticity, the operating rate of aluminum strip and aluminum foil is high. From the operating rate of leading enterprises, the operating rate of aluminum strip and aluminum foil related to new energy demand is still high at 83.0% and 83.7%, which supports the trend of electrolytic aluminum destocking.

Under the effective control of coal prices, tight supply and demand will push up the price of aluminum, and the profit of electrolytic aluminum may continue to be at a high level. The rapid rise in the price of thermal coal in the early stage has an adverse impact on the production of downstream industrial and commercial enterprises and residents’ heating in winter. With the increase of policy regulation, the futures price of thermal coal is basically stable at present. As the tight supply of electrolytic aluminum may continue, the aluminum price is expected to remain high, and the profit per ton of electrolytic aluminum may continue to obtain high profit.

Continue to reiterate: it is expected that the tight supply and demand situation will continue in 22 years, and the aluminum price may continue to be at a high level in 21 years. On the supply side, the national strategy of “carbon neutralization” continues to be promoted, the impact of the dual control policy of energy consumption continues, and the possibility that the production stability of electrolytic aluminum enterprises is reduced and the return to production is less than expected is still high. We expect the global electrolytic aluminum output to be 68.45 million tons in 2022. On the demand side, we judge that the marginal weakening of the demand side is more likely, and the demand for aluminum in the new energy field is difficult to make up for the slowdown in demand caused by the weakening of real estate in the short term. We predict that the global demand for electrolytic aluminum will be 69.33 million tons in 2022, and the gap between supply and demand will be 880000 tons. The aluminum supply is hard to see elasticity. The trend of low inventory and overall de inventory may support the aluminum price. It is expected that the aluminum price will continue to be high in 22 years. The risk lies in the higher than expected recycling of waste aluminum.

Core targets: Henan Shenhuo Coal&Power Co.Ltd(000933) , Yunnan Aluminium Co.Ltd(000807) , Tianshan Aluminum Group Co.Ltd(002532) , Aluminum Corporation Of China Limited(601600) , etc.

Risk warning: macroeconomic fluctuation risk; Risk of sharp fluctuations in raw material prices; Risk of large fluctuation of aluminum price; The downstream demand is lower than the expected risk; Environmental protection policies exceed expected risks, etc.

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