Will it be different this time?

There is a compelling structural story building in aluminium. There have been several false dawns in the industry over the past 10 years, but we believe the nationwide capacity cap in China, recovering global demand and increasingly ambitious global decarbonisation policies will lead to structurally higher prices over the next 5-10 years compared to the 2010s. Primary aluminium production is highly energy intensive; rising CO2 costs (and the internalisation of those costs), coal-fired production restraint and rising green product premiums will drastically change the competitive landscape of the industry. Renewables-based producers are the clear strategic winners; we reiterate our Buy ratings on Norsk Hydro (TP lifted to NOK 70) and Alcoa (TP lifted to $48) and we raise our RIO TP to £62.

Raising prices on tightening short- and medium-term outlook Following on from our bullish Global Aluminium report earlier this year, we are raising our aluminium price forecasts again by 6% to >$2,300/t in 2021 and 7% to $2,250/ t in 2022, largely reflecting global demand upgrades. Importantly for the equities, we are also lifting our long-term real price by 10% to $2,200/t (2021 real basis). With China placing a hard cap on domestic output at 45 mtpa, margins will need to remain structurally higher than the past 10 years in order to incentivise new production; we expect a balanced global market this year moving into a deficit over the next 3-4 years. In China, while there are top down slowing signals (credit, FAI), the physical market is tight and demand should remain strong over the next 6-12 months on account of resilient property trends and rebounding manufacturing demand. Following recessionary conditions in 2019 and 2020, ex-China demand still has significant room to recover this year and next.

Equities; structural shift yet to be priced in While the aluminium price has reacted to the improving demand and supply dynamics, the equities are still discounting the pre-2021 pricing regime of low profitability and cost curve-driven prices (i.e., an aluminium price of <$2,000/t vs spot of >$2,300). There is huge variance in CO2 intensity across the industry depending on power source. Coal-based production (largely in China and India) produces >16t of CO2 per tonne of primary metal compared to <4t for renewablesbased production and a global average of 13-14t. Hydro, Alcoa and RIO all benefit from renewables-heavy portfolios with carbon intensity at the bottom of the industry CO2 intensity curve (details within).