We are expecting a sustained bull-run in global aluminium prices over the next 12-18 months as there is a global synchronized directional movement towards reaching net-zero carbon emission, albeit different targeted timelines across various countries. We have noticed major structural decarbonisation trends across two key industries: (i) electric vehicles (EV) in the automotive sector; and (ii) renewable energy sectors globally – which we strongly believe that aluminium would have a pivotal role to play in these vital decarbonising movements. We project aluminium prices to close at US$2,950/tonne by end- 2021F and to further increase by 7% and 10% to an average of US$3,150/tonne and US$3,250/tonne in 2022F and 2023F respectively. For exposure to the aluminium space, we highly recommend Press Metal (BUY; TP: RM7.42).

Two strokes of prosperity – Synchronised global decarbonisation movements and recovery play. We are expecting a sustained bull-run in global aluminium prices over the next 12-18 months due to: (i) synchronised decarbonisation movements around the world to achieve net zero carbon emission, albeit different targeted timelines across various countries (Figure 1); and (ii) the general recovery post pandemic globally, or rather an “endemic reopening”. The International Monetary Fund (IMF) is forecasting a 2021-2022 world GDP growth of 6.0% and 4.9% growth respectively and we believe that this is due to the fact that more and more countries are slowly obtaining vaccine immunities against the Covid-19 pandemic and are entering its respective recovery phases, which would be supportive of the growth of global economy and the demand of primary aluminium.

Bright spots in the global transport sector to spill-over onto aluminium. The transport industry (both automotive and aviation) accounts for about c.23% of global aluminium consumption annually. In a bid to reduce carbon emissions, the electric vehicle (EV) trend is taking the world by a storm – to further scale down the long-term dependency on fossil fuels, replacing vehicles that typically operate using internal combustion engines (ICE). The International Energy Agency (IEA) has projected EV sales to increase by 40x (base case) to 70x (bull-case) by 2030F from 2015. This would also spill over into increased demand for aluminium as the aluminium content in an EV is approximately 70kg (39%) more than a typical ICE vehicle.

Growth prospects of solar energy. Solar power is the fastest-growing renewable source of clean energy. The International Renewable Energy Agency (IRENA) is expecting cumulative solar PV capacity to grow 6x to c.2.8k GW by 2030F. Aluminium is used in most clean-air power technologies but particularly solar. Based on our findings, we note that aluminium accounts for c.85% of most photovoltaic (PV) components in the form of the frames that holds the PV panels together.

Monstrous upside to aluminium. We envision the world at large to enter into an aluminium deficit in 2022-23F, in which demand would severely outstrip supply globally. This would ultimately lead to a drop in aluminium inventory in the London Metal Exchange (LME), lifting aluminium spot prices. With that, we are confident to draw an analogy to a sustained bull-run in global aluminium prices – even after a steep c.+100% recovery in aluminium prices from a low of US$1,465/tonne in April 2020. We project aluminium prices to close at US$2,950/tonne by end-2021F and to further increase by 7% and 10% to an average of US$3,150/tonne and US$3,250/tonne in 2022F and 2023F respectively. YTD 2021, aluminium prices have averaged at US$2,380/tonne and they were last seen at about US$2,915/tonne.

Maintain BUY on Press Metal Aluminium. For exposure to the aluminium space, we highly recommend PMETAL (BUY; TP: RM7.42) as we remain ecstatic and upbeat about the group’s earnings prospects in the next 12-18 months.

Combating Climate Change

Reducing Carbon Emissions

What is climate change? The United Nation (UN) defines climate change as long-term shifts in temperatures and weather patterns and since the 1800s, human activities have been the main driver of climate change, primarily due to burning fossil fuels like coal, oil and gas. The burning of fossil fuels generates greenhouse gas emissions (mainly carbon dioxide), which ultimately leads to Earth’s rising temperatures.

Net zero carbon emission. Net zero carbon emission will be achieved when all greenhouse gas emissions released by humans are counterbalanced by removing the equal amount of greenhouse gas from the atmosphere.

The Paris Agreement. The Paris Agreement is an international treaty on climate change, adopted in 2015. 196 countries have adopted to the Paris Agreement to combat global warming and build resilience to climate change. With that, there has been a synchronised global movement in which companies, cities, financial institutions and more than 130 countries have now set or are considering a target of reducing emissions to net zero by mid-century (Figure 2) according to the UN.

Key sectors spearheading the global movement towards decarbonisation. We highlight major structural and decarbonisation trends across two key industries: (i) Electric Vehicles (EV) in the automotive sector; and (ii) renewable energy sector and how aluminium would be playing a pivotal role in these decarbonising movements. As shown in Figure 4 below, the transport industry (both automotive and aviation) accounted for about 23% of global aluminium consumption in 2020.

Aluminium in the Global Transport Sector

Automotive

Electric Vehicles (EV). In a bid to reduce carbon emissions, the electric vehicle (EV) trend is taking the world by a storm – to further scale down the long-term dependency on fossil fuels, replacing vehicles that typically operate using internal combustion engines (ICE). Relatively new companies like Tesla and NIO, along with traditional car companies like General Motors (GM), Ford and Toyota have also widely known to be spearheading into the development of EVs.

Growth prospects of EV. The International Energy Agency (IEA) has projected EV sales to increase by: (i) more than 40-fold to 22.4mil units (base case under the Stated Policies Scenario); or almost 75-fold to 41.0mil units (bull case under the Sustainable Development Scenario) by 2030 from 0.5mil in 2015, representing robust CAGRs of 28% and 33% respectively under both scenarios (Figure 5 and 6).

Why Use Aluminium in EVs?

1) 1 unit of aluminium is able to replace about 1.6 units of steel in an automobile part, reducing the vehicle’s overall weight.

2) Reducing the weight by 10% in EV allows an additional 10% travel distance on the same charge.

3) An aluminium-intensive vehicle can achieve up to 20% reduction in total life cycle energy consumption.

4) Using advanced lighter-weight aluminium body structures can save up to US$3,000 per vehicle’s costs.

The estimated aluminium content in an electric vehicle is about 250kg, approximately 70kg more than a typical ICE vehicle. We also understand that aluminium will also be extensively used in the building of EV infrastructure like charging stations. The growth prospects of the robust EV market are expected to also drive the demand of aluminium over the next decade, primarily due to the need for light weighting.

Aviation

No thanks to the Covid-19 pandemic, the general aviation industry lost over US$118bil in 2020 according to the International Air Transport Association (IATA). Oliver Wyman, a leading global management consulting firm concludes that after a bumpy 2020, the aviation industry will be “playing catch-up” over the next 10 years. It forecasts the number of aircrafts to increase by 31% to 36.6k units in 2031 from 27.9k units in 2019 (Figure 7).

Aluminium in aircrafts. The airframe of a typical modern commercial transport aircraft is 80% aluminium by weight. From our findings, we highlight that aluminium alloys are the overwhelming choice for the fuselage, wings and the supporting structures of commercial airliners and military cargo/transport aircrafts. The recovery and growth of the aviation industry post-pandemic will also serve as a source of demand for primary aluminium.

Aluminium in the Global Renewable Energy Sector

Aluminium in Renewable Energy. Aluminium is used in most clean-air power technologies but particularly solar. Based on our findings, we note that aluminium accounts for c.85% of most photovoltaic (PV) components in the form of the frames that holds the PV panels together. We highlight that solar power is the fastest-growing renewable source of clean energy. The International Renewable Energy Agency (IRENA) is expecting cumulative solar PV capacity to grow 6x to c.2.8k GW by 2030F (Figure 8).

Solar PVs in Asia. Asia is expected to spearhead the global solar PV installations, with 65% of total global capacity installed by 2030 (Figure 9) to 1.9k GW. China’s total installed capacity is projected to reach around 1.4k GW and 2.8k GW by 2030F and 2050F respectively.

Based on our understanding, 19 tonnes of aluminium is required for a construction of a 1MW PV solar plant. We view the monstrous prospects of the solar PV growth to be one of the crucial drivers of primary aluminium demand over the next decade.

Global Aluminium Production (Supply)

Production of aluminium can be extremely carbon-intensive. According to the World Economic Forum, the aluminium industry generates >1.1mil tonnes of CO2e (carbon dioxide equivalent) emissions annually, which is c.2% of global human-caused emissions. This is unsurprising given the fact that aluminium production requires a lot of power, and most primary smelting activities are coal-powered (coal is composed of mainly carbon and hydrocarbons) which makes the industry immensely carbon-intensive.

“Green Aluminium”. Green aluminium refers to sustainable, low-carbon methods to produce the metal. It involves less carbon, cleaner and more energy efficient processes, which will result in lower emissions. From our checks, we gather that 88% of aluminium smelters in China are dependent on coal-generated power sources. Currently, only 22% of the world aluminium smelters are dependent on hydropower sources.

China is the world’s largest aluminium producer. Our findings show that in 2020 and 8M21 (Jan-Aug), China was responsible for the production of c.37.3k and 26.2k tonnes of aluminium, accounting for 57.2% and 58.1% of global aluminium output (Figures 10 – 15).

As at 8M21, global aluminium production grew 4.8% YoY.

China’s net zero carbon emission target. President Xi Jinping recently announced China’s commitment to achieve net zero carbon emission target by 2060. In August 2021, China has imposed production output limits on five aluminium smelters in Xinjiang and we believe that this was done to reduce the smelters’ power consumption, which will in turn reduce emissions. Xinjiang is a major smelting hub in China, accounting for c.20% of China’s supply of aluminium. China has trimmed a total of c.2.3mil tonnes of aluminium capacity YTD 2021.

Based on our various findings, we infer that any additional China coal-powered aluminium primary smelting capacity (both brownfield and greenfield) in the future will be somewhat capped, in our view. We expect China’s aluminium production’s growth to be somewhat flattish in 2021 and 2022 (from 2020 levels).

China releasing 800-900k tonnes of aluminium reserves. On June 10, Reuters reported that China is looking to release 800-900k tonnes of primary aluminium from its state reserves to ease the supply shortages in the country. We are unperturbed by this announcement as 800-900k tonnes of aluminium would only ease supply constraints for slightly more than a week (or about 2% of consumption) – as China consumes more than 45mil tonnes of primary aluminium annually. To date, China has auctioned a total of 210k tonnes of aluminium in 3 phases since July 2021.

Upcoming new aluminium production capacities. Our research highlights 4 major upcoming additional aluminium production capacities in the near-medium term, all powered by renewable energy, namely:

1) Alcoa: 268k tonnes annually, full commissioning by end-2022

2) UC Rusal: 428.5k tonnes annually, estimated commissioning 2021-2022

3) Press Metal Aluminium: 320k tonnes annually, full commissioning by 4Q2021

4) Hongqiao Group: 1mil tonnes annually, started commissioning Sept 2021

Complexity of hydro-powered smelters. While building hydro-powered smelters seems to be the solution going forward, we understand that it is not that simple due to: (i) upfront cost (capex) of building a hydropower plant can be millions of dollars – a small hydropower project cost ranges from US$1,300-8,000 per kW; (ii) it is challenging to find a suitable spot that has a large all-year round water supply and is close enough to existing power lines; and (iii) its dependency on the amount of water in any given location – making it susceptible to drought.

Outlook and Recommendation

Outlook. With the synchronised decarbonising movements globally to achieve net zero carbon emission and the general recovery post-pandemic across most countries, we expect the world at large to enter into an aluminium deficit in 2022-23, in which demand severely outstrips supply globally. This would lead to a drop in aluminium inventory in the LME, lifting aluminium prices over the next few years.

Forecast. We project aluminium prices to close at US$2,950/tonne by end-2021F and to further increase by 7% and 10% to an average of US$3,150/tonne and US$3,250/tonne in 2022F and 2023F respectively.

Our view on aluminium. We view the prospects of aluminium globally to be exceptionally robust in 2022-23F due to: (i) synchronised decarbonising trends globally; (ii) stronger demand from key sectors – automotive, aviation and renewable energy; (iii) post-pandemic economic recovery around the world – which will uplift demand; and (iv) empirical indicators all inferring a major global aluminium deficit.

For Exposure to the Aluminium Space, We Highly Recommend Press Metal (BUY; TP: RM7.42) for: (i) monstrous earnings growth prospects in FY22-23F (due to soaring LME aluminium spot prices, Phase 3 Samalaju and Phase 2 PT Bintan expansion plans); and (ii) its favourable cost structure with the bulk of its energy costs (from hydro power) locked in at very competitive rates over the long term.

Source: Hong Leong Investment Bank Research - 7 Oct 2021