Event: on March 1, Rusal announced on the Hong Kong stock exchange that due to the inevitable logistics and transportation challenges in the Black Sea and surrounding areas, it had to temporarily close the production of Nikolaev alumina refinery in Nikolaev region of Ukraine. The company said that it would not immediately have a wider impact on the aluminum production of the relevant aluminum smelters of the group and would take all necessary measures to ensure the sustainability of the business.
Comments:
Raw material: the closure of alumina plant will disturb the electrolytic aluminum production of Rusal. According to SMM data, Rusal’s Nikolaev refinery in Ukraine has a production capacity of 1.7 million tons / year. Ukrainian Nikolaev alumina refinery is Rusal’s second largest alumina refinery (aughinish refinery in Ireland has a production capacity of 2 million tons / year), contributing 21.5% of Rusal’s 7.86 million tons of alumina production in 2019. The closure of the alumina plant may cause a shortage of raw materials for electrolytic aluminum production of Rusal.
Supply: if Europe and the United States sanction Rusal, or disturb the global electrolytic aluminum supply in a short time. Recently, Europe and the United States have increased sanctions against Russia, including closing the swfit settlement function of some of their banks, and the market has increased concerns about sanctions against Rusal. Rusal produced 3.74 million tons of electrolytic aluminum in 2021, accounting for about 5.6% of the world; If Europe and the United States impose sanctions on Rusal, it will have an impact on the short-term supply of overseas electrolytic aluminum.
Energy: natural gas prices soared, and European aluminum enterprises are still likely to reduce production. Since 2021q4, many aluminum smelting enterprises in Europe have reduced production due to the high power cost caused by the rise of natural gas price. According to SMM statistics, by the end of January 2022, the production capacity of electrolytic aluminum in Europe has exceeded 800000 tons / year, accounting for about 1% of the global electrolytic aluminum production capacity. Russia accounts for 39% of the EU’s total natural gas imports (the first half of 2019). The conflict between Russia and Ukraine and the sanctions imposed by Europe and the United States on Russia will exacerbate the market’s expectation of disturbance to the European natural gas supply. The price of UK IPE natural gas futures rose from 59p / Semm in early 2021 to 300p / Semm on March 1, 2022, an increase of 408%. If natural gas prices remain high, European aluminum enterprises may further reduce production.
Inventory: Overseas inventory is still at an all-time low, and China is about to enter the inventory removal cycle. As of March 1, LME aluminum inventory had fallen to 814000 tons, a decrease of 9750 tons compared with February 28, at an all-time low. As of February 28, the national spot inventory of electrolytic aluminum was 1117000 tons, compared with 390000 tons before the Spring Festival (140000 tons during the Spring Festival and 250000 tons after the festival), which was lower than that in previous years. We believe that China’s downstream demand peak season is coming in March, the demand in real estate completion and other fields is expected to improve, and China’s destocking cycle is coming.
There is still a gap between aluminum supply and demand in China, and we continue to be optimistic about the upward trend of electrolytic aluminum prices. The supply of Russian aluminum may be disturbed, and the shutdown of aluminum enterprises caused by high power costs in Europe may also continue, which will continue to affect the supply of overseas electrolytic aluminum. Fundamentals are still the determinant of China’s aluminum price. It is optimistic that downstream construction will gradually resume after March. Under the background of low global inventory, the disturbance of foreign supply intensifies, which will continue to promote the upward price of electrolytic aluminum and the profit per ton of aluminum. Continue to recommend China Hongqiao, Henan Shenhuo Coal&Power Co.Ltd(000933) , Shandong Nanshan Aluminium Co.Ltd(600219) .
Risk warning: risk of electricity price policy adjustment; The high rise of aluminum price suppresses the risk of downstream demand; The growth of waste aluminum recycling exceeded expectations.
