YTD aluminium prices have risen 6% to >US$2,500/MT, buoyed by the reopening of China which is the largest global aluminium consumer. While maintaining our FY22 forecasts (average aluminium price assumption of USD2,400/MT), we raise our FY23F earnings by 7%, imputing higher average aluminium price assumption of USD2,550/MT (from USD2,500/MT previously). BUY with a DCF driven TP of RM6.30 based on WACC of 8.6% and a TG of 5% and imputes a 5% premium to reflect our 4-star ESG rating.

Demand for aluminium will be underpinned by the normalisation of economic activities, especially, recovery in the property sector which is supported by measures from the Chinese government. On the other hand, “green” requirements that have become more stringent, especially in China, will see the shutdown of smelters fuelled by fossil energy (especially coal), further tightening the global aluminium supply.

As fuel, coal powers up to 81% of China’s aluminium production in 2020. To achieve carbon neutrality by 2060, China has and will continue to cut coal-fired aluminium production capacity. The supply dynamics is also impacted by the Russia-Ukraine war with Western countries avoiding trade with Russia which produces up to c.6% of global aluminium supply. These factors will keep aluminium prices elevated. On the cost side of the equation, prices of alumina and carbon anode have fallen 2% and 13%, respectively, over the same period. This should help at least sustain the alumina cost to aluminium price ratio at about 14% (since 2021), which is below the historical average of 16%-17%. A low alumina cost to aluminium price ratio translates to better margins for aluminium smelters.

We continue to like PMETAL for its: (i) structural cost advantage over international peers given its access to lowcost hydro-power secured under four long-term PPA contracts ending between 2023 and 2040, (ii) strongly secured alumina supply with stakes in two alumina miners, i.e. Japan Alumina Associate (40%) and PT Bintan (25%) which supply 80% of its requirements, and (iii) green investment appeal as a clean energy source producer.

Source: Rakuten Research - 14 Feb 2023

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