Investment Highlights

• We do not expect a V-shaped recovery in global aluminium prices over the next 12–18 months, even if the Covid-19 pandemic is to be significantly contained, or treatments or vaccines are to be found for the pathogen. We are hesitant to draw an analogy to the steep recovery in aluminium prices after the 2008–2009 global financial crisis (GFC), i.e. by +31% to an average of US$2,200/tonne in 2010 from US$1,705/tonne in 2009 (Exhibit 1) as we see fundamental differences between the GFC and the lockdowns currently, and their impact on the aluminium sector. We keep our UNDERWEIGHT recommendation on the sector.

• The GFC started with the subprime mortgage meltdown in the US which subsequently evolved into a global banking crisis. It was a financial crisis that snowballed into an economic crisis (which also hurt aluminium demand and hence prices) but was resolved relatively quickly via financial bailouts. On the other hand, the lockdowns currently is a global health crisis that is choking both aggregate demand and supply, and it cannot be resolved via financial bailouts alone. For the aluminium sector, an added predicament is that smelters globally have continued to churn out aluminium despite the collapse in demand from key consuming industries, i.e. automotive/aviation and construction (with a combined market share of about 50%), as it is structurally a very costly affair to shut down and restart aluminium smelting plants. This has led to a significant buildup of inventory.

• We project aluminium prices to drop by 12% to US$1,600/tonne in 2020 vs. US$1,812/tonne in 2019. This is in line with the steep swing in global GDP growth from +2.9% in 2019 to -3.0% in 2020 (as projected by the International Monetary Fund or IMF). YTD, aluminium prices have averaged at US$1,660/tonne and they were last seen at US$1,487/tonne. We project a U-shaped recovery in aluminium prices, rising by 6% to US$1,700/tonne in 2021, in line with the recovery in global GDP, projected at +5.8% by the IMF. Historically, there was a strong correlation between global GDP growth and aluminium prices (also see Exhibit 1).

Source: AmInvest Research - 5 May 2020