Morgan Stanley: Aluminum profit margins will continue to expand sustainably, CHINAHONGQIAO (01378) preferred in the industry.

Morgan Stanley releases a research report stating that due to the continued decline in raw material prices and the increasing tension in the global aluminum market, the bank believes that the aluminum profit margin will sustainably expand. It also favors stocks that are more sensitive to the fall in aluminum prices compared to alumina prices. The top choice in the industry is CHINAHONGQIAO (01378), with the target price raised from HK$15.4 to HK$19.8. Aluminum Corporation of China (601600.SH, 02600) has its target price raised from RMB 8.7 and HK$5.5 to RMB 9.1 and HK$7; while Shandong Nanshan Aluminium (600219.SH) saw its target price decrease from RMB 5.2 to RMB 5. Morgan Stanley's main points are as follows: Aluminum producers will benefit from higher profit margins in 2025 With aluminum output not expected to increase, but with more affordable raw material inputs, aluminum producers will achieve higher profit margins and profitability in a tightening global aluminum market. The bank analyzes the significant impact of this shift on the global market. The shift from alumina shortage in 2024 to oversupply in 2025 is driving this change The shortage of bauxite and alumina led to record-high alumina profit margins in 2024, resulting in increased capacity awaiting production this year. In particular, the increase in alumina capacity in coastal China and bauxite expansion in Guinea are expected to increase supply and lower prices. Additionally, the world's largest aluminum producer, China, has almost reached its government-set production capacity limit of 450-460 million tons, which the bank expects not to be lifted due to China's carbon neutrality goals. Furthermore, given the uncertainties of cost and tariffs, it seems unlikely that idle capacity in Europe and the United States will be restarted soon. What are the factors driving aluminum demand? In Europe, Germany's new spending plan is supplementing construction/transport demand, with other countries possibly following suit. In China, despite a downturn in the real estate industry, demand from energy transition and the automobile industry, as well as flexible grid investments and CECEP Solar Energy's power modules, provide stronger demand. In the United States, the bank's models reflect a 1% increase in demand in 2025, but note that the bank's US economists have recently revised down their growth expectations. Commodity assumptions update The bank's commodity research team projects a global surplus of 4 million tons in the alumina market in 2025, increasing to 11 million tons in 2026. The bank expects the alumina price to drop to $350/ton in the second quarter and to $400/ton by the end of the year, compared to previous forecasts of $625/ton and $450/ton, respectively. The price is expected to stabilize between $350-400/ton thereafter, assuming that bauxite prices continue to receive structural support. The bank predicts that the global aluminum market deficit will reach 257,000 tons in 2025 and increase to 630,000 tons in 2026. Which companies will benefit from this? The bank favors stocks that are more sensitive to the decline in aluminum prices compared to alumina prices, such as in the United States: Alcoa, in Europe: Norsk Hydro, in China: CHINAHONGQIAO and Aluminum Corporation of China, and in Australia: S32 and Rio Tinto. The increase in tariffs on imported aluminum and related products by the United States may have a small impact on China but will increase production costs for US manufacturers The United States is a major aluminum importer, with net imports accounting for about 82% of its demand. Increasing tariffs in the United States may alter the global aluminum trade flow, raise costs for downstream users in the US, and increase the country's price premium.