Investment Opportunities in Aluminum Stocks? Goldman Sachs Predicts Higher Aluminum Prices Due to a Larger Deficit

As the world's largest producer and consumer of aluminum, China's primary aluminum production constitute around 58.36% of the worldwide total in 2022, while its primary aluminum consumption accounts for approximately 58.67% of the global total. Consequently, any fluctuations in supply and demand from China are critical in determining the trajectory of aluminum prices.

On the supply side, China has been transitioning from coal-fired to hydroelectric aluminum production in recent years due to environmental protection needs. Currently, major hydroelectric aluminum production areas such as Yunnan are gradually entering the winter dry season and facing power shortages and production restrictions. This situation has resulted in an estimated annualized production capacity reduction of approximately 1.15 million tons, which will further intensify supply contraction in the short term. In the long term, China's annual production cap of 45 million tons of electrolytic aluminum is likely to provide ongoing support for aluminum prices. Moreover, the heightened uncertainty of geopolitical conflicts has led to disturbances on the aluminum supply side.

While the recovery of demand for aluminum still requires additional confirmation, China is increasing its policy support for the real estate industry. In the medium to long term, as housing construction reaches a stable level, the traditional demand for aluminum in building applications is anticipated to stabilize as well. Additionally, the long-term growth of new energy vehicles and photovoltaics is expected to further stimulate the demand for aluminum.

According to the latest data, China's aluminum imports rose for the fifth consecutive month in October, reaching 351,065 metric tons. This marks a 5.8% increase from the previous month and a significant surge of 78.7% compared to the same period last year. The rise in imports is attributed to an anticipation of reduced supply in the domestic market.

Goldman Sachs expressed bullish sentiment towards commodities in a note dated mid-November, expecting higher spot commodity prices due to an improving cyclical backdrop, significant carry returns from structural tailwinds, and hedging value against negative supply shocks. The bank further predicted a 20.9% increase in the S&P GSCI Commodity Index over the next 12 months. Specifically, they expect a sharp tightening of aluminum stocks into the mid-decade period, which will drive up prices starting from the second half of 2024.