The Zhitong Finance app learned that Huatai Securities released a research report saying that starting in November, electrolytic aluminum companies in Yunnan will once again limit production, and the total scale of production reduction may reach 1.15 million tons, which is equivalent to 19.9% of Yunnan's current operating capacity of 5.78 million tons. There has been a correction in domestic electrolytic aluminum prices since October. The main thing is that the very strong rise in aluminum prices before the National Day holiday has opened up an import window which compounded the accumulation during the National Day holiday exceeding that of previous years, but after the correction in aluminum prices, the primary aluminum import window has basically closed. The current reduction in electrolytic aluminum production in Yunnan Province will help drive the tightening of supply and demand and the improvement of price sentiment in the domestic and global electrolytic aluminum markets, and will also help curb the accumulation of aluminum ingots around the 2024 Spring Festival. The bank believes that the reduction in production of electrolytic aluminum in Yunnan will have a strong supporting effect on the price of electrolytic aluminum.

The main views of Huatai Securities are as follows:

Yunnan's electrolytic aluminum production limit has resumed, and the production limit may reach 1.15 million tons

According to SMM reports, due to the traditional dry season, electricity supply and demand in Yunnan is once again tightening. Starting in November, the total production reduction scale may reach 1.15 million tons by electrolytic aluminum companies in Yunnan. Although this is a decrease from the maximum production reduction of 1.9 million tons in the first half of this year, it is also equivalent to 19.9% of Yunnan's current operational capacity of 5.78 million tons. The four electrolytic aluminum companies in the province expect a total production reduction of 9%-40% in accordance with the relevant regulations on the energy efficiency control of electrolytic aluminum enterprises in Yunnan Province. The bank expects that the production cuts of various enterprises may be basically the same as in the first half of the year. There are expectations for the market to cut production of electrolytic aluminum during the dry season in Yunnan, but the time for production cuts to begin and the extent of production cuts was earlier and larger than the bank's expectations. It is currently uncertain when the production cuts will end. It is expected that Yunnan Province will decide according to the 1Q24 electricity supply and demand situation.

4Q23-1Q24 Aluminum prices are expected to remain high and stable, and the industry's high profitability will continue

Currently, the operating capacity of electrolytic aluminum nationwide is 42.94 million tons, and in 4Q23, Inner Mongolia Baiyinhua Aluminum may have a new production capacity of 200,000 tons. The production capacity reduction in Yunnan Province this time is equivalent to about 2.7% of the country's operating capacity. There has been a correction in domestic electrolytic aluminum prices since October. The main thing is that the very strong rise in aluminum prices before the National Day holiday has opened up an import window which compounded the accumulation during the National Day holiday exceeding that of previous years, but after the correction in aluminum prices, the primary aluminum import window has basically closed. The current reduction in electrolytic aluminum production in Yunnan Province will help drive the tightening of supply and demand and the improvement of price sentiment in the domestic and global electrolytic aluminum markets, and will also help curb the accumulation of aluminum ingots around the 2024 Spring Festival. The bank believes that the reduction in production of electrolytic aluminum in Yunnan will have a strong supporting effect on the price of electrolytic aluminum, so that aluminum prices can be stabilized at a high level and that the domestic industry of about 3,000 yuan/ton can maintain high profits.

The tight supply and demand of electricity in Yunnan is expected to gradually ease, but it will still take some time

In the first half of this year, the electrolytic aluminum industry in Yunnan Province stopped production at a maximum of 1.9 million tons. With the obvious improvement in incoming water since June, production capacity of 1.8 million tons resumed in June-August, but this earlier shutdown will cause Yunnan electrolytic aluminum companies to carefully consider the scale of production capacity to resume production the next time they resume production. The construction of large-scale hydropower stations in Yunnan Province has basically been completed. During the 14th Five-Year Plan period, we will mainly develop new photovoltaic energy and the 770,000-kilowatt thermal power units currently under construction. The target for new energy production this year is 15 GW (1.5 GW in 2022), and it is expected that the installed capacity of new energy to be put into production in 2024 and 2025 will also be around 10-15 GW. The bank expects the tight supply and demand of electricity in Yunnan Province to gradually ease, but it is still facing a situation where the electricity load is insufficient (intermittent photovoltaic power generation), especially during the dry season. Some of the electrolytic aluminum production capacity planned to move into Yunnan is also expected to slow down the relocation.

Supply escorts, new demand boosts, aluminum prices are promising in the medium term

The bank expects the electrolytic aluminum industry to continue to tighten and usher in a more sustainable upward cycle than in the past, as China basically hits the 45 million tonne capacity ceiling, and structural demand driven by low global inventories, photovoltaics, and vehicle lightweighting. The fact that China's electrolytic aluminum hits the production capacity ceiling means that overseas electrolytic aluminum will face a longer reaction cycle and weaker response capacity compared to China. Strong growth in PV installations in 2023 offset the adverse effects of declining domestic real estate, declining exports of aluminum products, and increased imports of primary aluminum. The rapid development of new energy vehicles around the world is also expected to increase demand by about 1.5 to 2 million tons each year. In 2023-25, the bank expects the price of electrolytic aluminum in China to be 18,600/19,500/20,000 yuan/ton. The performance of the global economy, particularly the US economy, in 2024 will be the core influencing variable of aluminum prices.

Risk warning:Global economic growth was significantly weaker than expected, and demand for photovoltaic wind power/new energy vehicles grew lower than expected.