Rising Aluminum Prices Difficult to Change Aluminum Companies' Losses in Smelting and Processing
Aluminum prices have recently surged, triggering a rally in aluminum-related stocks on the A-share market. Following the lead of nickel and zinc, five aluminum stocks saw significant gains on Tuesday. Since July, LME aluminum prices have risen nearly 8%, while Shanghai Aluminum has climbed approximately 5%. This upward trend has sparked renewed interest in the sector.
Looking back at the broader price movement, aluminum prices have followed a V-shaped pattern since early 2014. The domestic futures price fell from 14,100 yuan per ton at the start of the year to 12,510 yuan per ton in mid-March, then experienced a period of volatility before stabilizing. Currently, aluminum prices are roughly similar to where they were at the beginning of the year, but the annual fluctuation has reached as high as 12.7%.
Despite the recent price and stock surge, many analysts remain skeptical about the long-term outlook for the aluminum industry. They warn that overcapacity remains a serious issue, and once existing and new production capacities come online, aluminum prices could face significant downward pressure. Prices are likely to remain low and volatile, with the overall industry facing continued challenges.
The financial health of aluminum companies in the first half of the year highlights these difficulties. According to the China Non-Ferrous Metals Industry Monthly Index, even though aluminum prices have rebounded, supply pressures have limited recovery. On average, aluminum prices still fall below the cost of electrolytic aluminum production, leading to further declines in smelting profits. From January to May, the aluminum smelting industry reported losses of 8.2 billion yuan, a 5.2 billion yuan increase compared to the same period last year.
Meanwhile, the aluminum rolling industry managed to turn a profit of 15.6 billion yuan in the first half of the year, a 6.9% year-on-year increase. This divergence shows the uneven impact of the market across different segments of the aluminum sector.
Among listed aluminum companies, more than 20 firms are involved in the industry. Based on semi-annual earnings reports from 11 companies, six are expected to report losses for the first half of the year, including three that recorded their first-ever losses—Shenhuo Shares, Lufeng Environmental Protection, and Xinjiang Zhonghe. Excluding China Aluminum, the other five companies are projected to collectively lose nearly 800 million yuan.
The losses in the aluminum sector are primarily due to oversupply and persistently low product prices. For example, China Aluminum reported a loss of 2.157 billion yuan in its first-quarter results, and it's expected that cumulative net profit for the year may still be negative.
However, most of the loss-making companies are in the smelting segment, which has seen increased losses compared to previous years. In contrast, the aluminum rolling processing industry has maintained better profitability, with companies like Liyuan Refinement, Minfa Aluminum, and Mingtai Aluminum reporting net profits ranging from 203 million to 225.7 million yuan. Mingtai Aluminum even expects a 50%-60% increase in profit for the first half of the year.
Industry analysts attribute the growing losses in smelting operations to high electricity costs, an unfair power environment, the difficulty of retiring outdated production capacity, and insufficient support for consumption expansion policies. On the other hand, aluminum rolling companies have improved their upstream premium capabilities through recent integrations. It is expected that the aluminum processing industry will continue to outperform the smelting sector in the second half of the year.
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