NEWS of China’s reopening fuelled a rebound in aluminium prices to a high of US$2,600 a tonne early this year, as the world’s second-largest economy consumes more than 60% of global aluminium output, mainly for its transport, construction and equipment manufacturing sectors.

Can aluminium prices be sustained amid the expected global economic slowdown? Has China seen a pickup in economic activities that will contribute to consumption of the metal?

Driven by the commodity boom, aluminium touched a more than 13-year high of US$3,800 a tonne on the London Metal Exchange (LME) in March 2022, before easing to a low of US$2,100 last September.

An analyst with a non-bank-backed research house is not too concerned about the impact of slowing global growth on the aluminium industry as he believes supply constraints will continue to be a strong support for aluminium prices.

“I don’t foresee prices dropping below US$2,000 a tonne. In fact, the current level is quite comfortable, as it barely crossed the US$2,000 mark pre-pandemic. Also, the cost is higher right now — not only raw materials, but also logistics and labour costs. So, we’re unlikely to see prices fall back to low levels,” he tells The Edge.

Furthermore, he points out, any potential restrictions on Russian aluminium following the invasion of Ukraine is a potential catalyst for the industry.

Although it remains to be seen whether efforts to revive China’s property sector will translate into volume for the aluminium industry, the analyst believes supply-demand dynamics will be able to offset any slowdown in demand.

Annie Ao, an analyst at S&P Global Ratings, observed no strong increase in demand for aluminium in the period ended January 2023, which is typically a low season for the aluminium industry, with capacity utilisation staying sluggish.

There have been some positive signs, however, from China’s high-frequency economic data since early this month.

“For example, the utilisation rate of the industry has been increasing. New-home prices trended up for the first time in a year in January 2023, with prices rising on a monthly basis in 36 out of the 70 mid-sized and large cities. The Chinese government also announced more supportive measures for the real estate industry,” Ao tells The Edge.

She expects a gradual recovery of demand for aluminium, with the momentum likely to strengthen in the second half of this year. Contributing industries include real estate, infrastructure, electric vehicles (EVs) and solar.

“It is estimated that 25% to 35% of the demand for aluminium comes from the real estate market. Our real estate team expects the property crisis to reach a turning point in the next three to six months, with a possible recovery in the second half of 2023,” she says.

“The government is rolling out more stimulus measures for infrastructure construction, but it will take time for the projects to be launched. Meanwhile, the EV and solar industries accounted for about 15% of aluminium demand in 2022. Our auto team expects moderate growth for light-vehicle sales in 2023, reflecting improving consumer sentiment and the end of the government stimulus this year.”

On the supply side, tightness caused by the Russia-Ukraine conflict will continue this year, says Ao.

For RHB Research analyst Oong Chun Sung, the gradual aluminium demand recovery will largely hinge on the pace of recovery of the property market in China and global economic activity.

He says, “In terms of demand for aluminium, we note that Shanghai aluminium physical inventory continued to pile up to 291,416 tonnes as at Feb 21, versus 95,881 tonnes at the beginning of the year. In terms of supply, China’s aluminium production in January was flattish month on month (m-o-m) at 3.44 million tonnes.

“While the demand-supply dynamic may appear to suggest a relatively sluggish demand, China’s new-home price sales recorded their first ever m-o-m increase in over a year in January, likely attributed to the pent-up demand in higher-tier cities.”

In response to queries from The Edge, Press Metal Aluminium Holdings Bhd says ity has observed some encouraging but uneven signs of demand recovery for aluminium across different markets.

“Although it is too early in the year to conclude, policymakers globally have been supportive in introducing various policies to stabilise growth and promote consumption,” the company says.

Moreover, Press Metal notes that the renewable energy sector is set to become a growth engine for alu­minium because of solar photovoltaic and wire rod demand from infrastructure spending on transmission lines.

“Global demand for primary aluminium registered a marginal growth rate in 2022 despite a challenging year globally. The transportation and construction sectors were the key demand drivers for aluminium in 2022, making up close to 50% of the demand. The electrical, packaging and foil stock industries were the other prominent sectors for aluminium demand.

“The application for aluminium is vast and it has been replacing traditional materials. Even though global demand from the construction sector softened last year, it still contributed a significant 22% to total aluminium demand. Going forward, government initiatives such as the US infrastructure bill or supportive policies towards the property market from the Chinese government are some drivers in reviving demand from the sector,” it explains.

While declining to give aluminium price projections, Press Metal agrees that supply constraints from the West will continue to persist for now. At the same time, it says a stronger-than-expected recovery led by China will push the demand for aluminium higher, given that reported aluminium inventory at bonded warehouses remain close to multi-year lows.

“Our production grew and sales remained healthy on the back of expanded volume in 2022 despite economic uncertainties. Overall, we remain hopeful, with European recession fears easing and the probable demand recovery from China’s economy reopening. Demand for aluminium towards green industries will [see a resurgence] as the world continues on its decarbonisation agenda.

“The group is focusing on deepening our penetration in certain markets, given the evolved landscape brought about by the Russian-Ukraine war, and to impel higher value-added products sales to drive growth in 2023,” it adds.

It also highlights that some of the external headwinds faced last year — such as  freight costs stemming from supply chain disruptions, weakened aluminium prices as a result of recession fears and high inflation — have dwindled, with global freight costs declining more than 30% and high prebake carbon price easing.

Oong’s aluminium price forecast is US$2,600 a tonne for 2023, with key challenges being lower-than-expected demand if the global economy slips into a recession, concerns about carbon emissions in the aluminium production process and the US Federal Reserve’s hawkish tone.

Stock-wise, he expects Press Metal to deliver 37% growth in earnings this year, supported by a favourable cost trend and the resumption of China’s economic activities. Notably, China’s Purchasing Managers’ Index (PMI) rose to 50.1 in January from 47 in December last year.

On cost trend, he notes that the price of carbon anode — one of the main raw materials for aluminium production — has eased 13% since early this year, while the alumina-to-aluminium cost ratio remains favourable at 14% this month, largely unchanged from 2022. A lower cost ratio suggests higher margins for aluminium smelters.

The non-bank-backed research house analyst estimates that Press Metal will record a net profit of RM1.7 billion this year, versus RM1.5 billion in 2022.

Press Metal’s FY2022 is poised to be another record year, with consensus expecting the group to register a net profit of RM1.51 billion. In the first nine months of 2022, its net profit jumped 54% to RM1.15 billion from RM744.63 million in the same period a year earlier.

In FY2023, the group is forecast to further expand its profitability by raking in a net profit of RM1.92 billion, followed by RM2.24 billion in FY2024 and RM2.88 billion in FY2025, according to Bloomberg data.

Of the 11 analysts covering Press Metal, nine have it on “buy” while two gave it a “hold”, with a target price of RM6.16, which translates into an upside potential of 18.5% based on its closing price of RM5.20 last Wednesday. This gave the company a market capitalisation of RM42.8 billion.

Trading at a forward 12-month price-earnings ratio of 28 times, the stock has gained 6.6% year to date. The counter skidded to a low of RM3.90 last September before rebounding to above RM5 this year.

Press Metal is the largest integrated aluminium producer in Southeast Asia. It has a smelting capacity of 1.08 million tonnes and an extrusion capacity of 210,000 tonnes a year.

Its peers Alcom Group Bhd and A-Rank Bhd have seen their share price increase 6% and 6.7% respectively since early this year. LB Aluminium Bhd, however, is down 8.1% in the same period.