Rising Aluminum Prices Difficult to Change Aluminum Companies' Losses in Smelting and Processing
Aluminum prices have recently surged, driving a rally in aluminum-related stocks on the A-share market. Following the rise in nickel and zinc, five major aluminum companies saw significant gains on Tuesday. Since July, London Metal Exchange (LME) aluminum prices have climbed nearly 8%, while Shanghai Aluminum has risen by approximately 5%. This upward trend has sparked renewed interest in the sector.
Looking back at the past decade, aluminum prices have followed a V-shaped pattern. From early 2014, the domestic futures price fell from 14,100 yuan per ton to 12,510 yuan per ton in mid-March, marking a sharp decline. However, the market has since experienced a period of volatility and partial recovery. Currently, aluminum prices are roughly where they were at the start of the year, but the annual fluctuation has reached as high as 12.7%.
Despite the recent price surge and stock performance, many analysts remain cautious about the long-term outlook for the aluminum industry. They argue that overcapacity remains a critical issue, making it difficult for the sector to sustain growth. If new production capacity comes online, aluminum prices could face significant downward pressure, leading to continued low volatility and challenging conditions for the industry.
The financial struggles of aluminum producers are evident in their first-half profitability. According to the China Non-Ferrous Metals Industry Monthly Index report, even with a rebound in prices, supply pressures have limited recovery. The average aluminum price is still below the cost of electrolytic aluminum production, causing further declines in smelting profits. From January to May, the aluminum smelting industry reported a loss of 8.2 billion yuan—an increase of 5.2 billion yuan compared to the same period last year.
Meanwhile, aluminum rolling companies have managed to turn a profit, earning 15.6 billion yuan in the first half of the year, up 6.9% year-on-year. This divergence highlights the challenges faced by smelting firms versus processing companies.
Several listed aluminum companies have also suffered significant losses. Out of more than 20 aluminum-related firms, six are expected to report losses between January and June, with three of them recording their first-ever losses. Shenhuo Shares, Lufeng Environmental Protection, and Xinjiang Zhonghe are among those struggling. Excluding China Aluminum, these five companies are collectively expected to lose nearly 800 million yuan.
The primary causes of these losses include overcapacity in electrolytic aluminum production 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 likely the company will continue to post losses through the next reporting period.
However, the losses are mostly concentrated in smelting companies, which have seen their losses grow compared to last year. In contrast, aluminum rolling companies—such as Liyuan Refinement, Minfa Aluminum, and Mingtai Aluminum—have maintained strong profitability. Their net profits for the first half of the year are expected to range between 203 million and 225.7 million yuan, with Mingtai Aluminum anticipating a 50%-60% profit increase.
Industry experts suggest that the losses in smelting operations stem from high electricity costs, an unfair power environment, and the difficulty of retiring outdated production capacity. On the other hand, aluminum processing companies have improved their upstream pricing power through integration in recent years. As a result, the processing industry is expected to perform better than the smelting sector in the second half of the year.
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