Main points:

Long-term, large and deep losses force the clearance of high-cost capacity of electrolytic aluminum, while inhibiting the release of new capacity. Domestic production capacity of about 36 million tons in February and march led to little increase in output in the first quarter year on year. Macro good is gradually cashed in, season consumption opened, aluminum prices have gone higher repair industry profits.

Core logic:

Combined with the enterprise production scheduling plan, the domestic electrolytic aluminum production capacity in February and March 2019 is about 36 million tons, returning to the level after the administrative capacity reduction at the end of 2017. In terms of consumption, macro frequently released good, cars to the countryside, home appliances to the old for new, tax cuts and other plans are gradually implemented. With the implementation of favorable policies, the traditional peak season is expected to start in early march.

In the industrial chain, the relatively high policy premium of bauxite in shanxi and henan will be weakened, with a decrease of 100 yuan/ton expected in the next three months. With alumina in loose supply, the fall in ore prices will shake the cost support for alumina, which is expected to move closer to 2,600 yuan per ton. Electrolytic aluminum supply and demand pattern improvement, alumina cost reduction will improve the electrolytic aluminum industry profits.

From the perspective of industry profit improvement, at the current level of 2,800 yuan/ton of alumina, the cost of electrolytic aluminum industry is about 13,950 yuan/ton. That means there is little pressure on supply from new capacity before aluminium prices rise to rmb13,900-14,000 a tonne.

Operation Suggestions:

Under the background of suppressed electrolytic aluminum output and improved demand, the price of aluminum should be treated with more ideas, with a target of 14,000 yuan/ton.

Risk factors: consumption falls short of expectations.

I. aluminum price stage

Reviewing the trend of aluminum prices at home and abroad from 2017 to now, according to the core logic of the annual driving market, it is divided into three stages.

The first stage: the year of 2017 is a process from the expected to the implementation of the administrative capacity reduction. The price characteristics are shown as expected to cash in the third quarter to stimulate the price increase, the internal market is significantly stronger than the external one, but the supply contraction in the fourth quarter enters the platform area, the pace of social inventory destocking slows down, and the price falls sharply.

The second stage: 2018 is a year with intensive impact of industrial chain events. In march, norsk hydro was forced to shut down 3.2 million tons of alumina production capacity. In April, the United States announced sanctions on rusal, and the external price was stronger than the internal price. The improvement of mines in shanxi and henan promoted the rebound of aluminum prices due to the shortage of bauxite in some areas. However, zui was eventually affected by the increasingly prominent economic downward pressure, leading to increased losses in the industry and the withdrawal of high-cost production capacity.

In the third stage, after the closure of high-cost production capacity for eight months, the production capacity returned to the level in late 2017 and early 2018. Under the stable economic background, the economic stimulus increased, and aluminum price was brewing a rebound.

What will happen in the next three months

Before the Spring Festival, the price of aluminum dropped to 13,230 yuan/ton. Around the Spring Festival, another 370,000 tons of production reduction plan was added. The industry continued to suffer losses and the supply decreased. So what's going to happen to the industry in the next three months? What are the investment opportunities?

2.1 large loss for a long time, inhibiting the willingness of new production

In 2011 China's electrolytic aluminium open "west to east not retreat" long change, superimposed transformation of national economic development, the excess pressure makes aluminium electrolytic aluminium industry shock downward, industry profits will be squeezed, have taken place in the fourth quarter of 2015 industry deep losses, losses from 1000 yuan/ton rapidly expand to 2000 yuan/ton, struggling to support the high cost of production concentration closure of large area, meet for electrolytic aluminium industry has vitality.

In 2016-2017, the aluminum industry started a relatively long period of profitability. On the one hand, the industry was reshuffled in 2015; on the other hand, the supply was restrained due to the inventory check and shutdown of illegal production capacity. After September 2018, the domestic bauxite is in partial tension, and the alumina is changed from import to export due to the influence of nordrew. The price is high, which makes the cost of electrolytic aluminum industry high, while the growth of terminal consumption is only 4% for the whole year, which draunts the aluminum price and leads the industry into the state of loss.

Under the background of the dynamic withdrawal of high-cost production capacity, the accumulated cash cost loss dividing line of domestic electrolytic aluminum industry is calculated according to the monthly average price of Yangtze river A00 aluminum in December 2018 and January 2019, which is 72% and 78% respectively, and the industry has a large area of losses. From the absolute value of the loss, the industry loss has been close to 1000 yuan/ton, zui new data industry loss of 650 yuan/ton, the loss of six months. The long-term, deep range and large scale losses, while promoting the clearance of electrolytic aluminum production capacity, have seriously inhibited the willingness to put new production capacity into production.

In 2019, the willingness of new production has dropped to freezing point. In January, only shaanxi meixin put into production 27,000 tons, Inner Mongolia chuangyuan put into production 180,000 tons, and in the first quarter, only two guangxi units with 100,000 tons are planned to put into production in March, and the rest have no intention to enter the market despite of losses.

2.2 the growth rate of supply decreases, and the median of spring accumulator quantity is low

According to Aladdin, domestic electrolytic aluminum production in December 2018 was 3.0973 million tons, corresponding to a production capacity of 36.425 million tons. According to the situation of domestic operating capacity and newly added capacity in the first quarter, it is expected to produce 3.06 million tons in January 2019, 2.75 million tons in February and 3.04 million tons in March, basically no increase compared with the same period in 2018.

The Spring Festival accumulator is now approaching the end, and the increment of 400,000 tons is in line with our expectation. Judging from the current increase rate of accumulator, downstream procurement and spot discount, it is expected that the destocking will start in early march. Although the 1.7-1.75m tonnes level is not necessarily low for inventories, it is expected to fall below 1m tonnes during the destocking cycle, given the supply-side constraints.

2.3. Stimulus comes first before consumption

Since the middle of 2018, the country has begun to continuously release the signals of stable economic development. Under the background of still large downward pressure on the economy, the government started to strengthen the policy of maintaining stability in the fourth quarter, and the proactive fiscal policy became the key to support the bottom, and the monetary policy cooperated with it. The central bank issued more than 1.8 trillion yuan of transfer payments and 1.39 trillion yuan of local government bonds in advance, which were issued in January. In terms of micro industrial policies, we are planning to introduce the automobile to the countryside, plan to carry out the household appliance downward plan to promote consumption replacement and renewal, and take measures to reduce fees and taxes.

According to the current stimulus intensity and credit data, aluminum consumption growth is expected to maintain at 4% in 2019, the same as last year, but supply growth needs to be reduced, the adjusted balance sheet is shown in table 5.

2.4 expected improvement in consumption, loose cost and difficult to drag down aluminum prices, industry profits are expected to continue to improve

As the rectification of bauxite in the mainland has come to an end temporarily, the mines in line with the mining procedures in shanxi and henan will be opened one after another. It is expected that the quantity will be increased after the spring, and the policy premium to bauxite will be removed. It is estimated that the price of bauxite will have a drop space of 100 yuan/ton.

As for the decline of bauxite price, the excess supply of alumina is unable to cope with it. The decline of this part of cost will be fully reflected in the price of alumina. It is expected that alumina will move towards the cost end, that is, the probability will return to the vicinity of 2,600 yuan/ton, which means that the cost of electrolytic aluminum industry will drop to about 13500 yuan/ton.

If the downward speed of alumina is not as expected, the industry cost will be 13,950 yuan/ton based on the price of 2,800 yuan/ton alumina. Then, the electrolytic aluminum price must recover to at least 13900-14000 yuan/ton, it is possible to stimulate the release of new capacity, and then change the supply and demand pattern.

Summary and Suggestions

Electrolytic aluminium industry continues for a long time, large area, the amplitude of the deep loss, high cost capacity continues to occur before, during, and after the Spring Festival, and will severely inhibit new capacity operation, 2, 3, 2019 in domestic about in electrolytic aluminium production capacity of 36 million tons, and at the end of 2017 in early 2018 was flat, basic no incremental output year-on-year in the first quarter of 2019.

Since the beginning of the year, macro frequent release of good, cars to the countryside, home appliances for the old for the new, tax cuts and other plans are gradually implemented. On the micro level, the social stock increment of electrolytic aluminum is in line with the expectation, at the medium and low level in recent years. With the implementation of good policy, the traditional season is expected to occur.

In terms of industrial chain, shanxi and henan have achieved stage results in the mining rectification. The output of bauxite with complete procedures will be released after the Spring Festival, and the relatively high policy premium of bauxite will be weakened, with an estimated decrease of 100 yuan per ton. With alumina in loose supply, the fall in ore prices will shake the cost support for alumina, which is expected to move closer to 2,600 yuan per ton. Electrolytic aluminum supply and demand pattern improvement, alumina cost reduction will improve the electrolytic aluminum industry profits.

From the perspective of industry profit improvement, at the current level of 2,800 yuan/ton of alumina, the cost of electrolytic aluminum industry is about 13,950 yuan/ton. That means there is little pressure on supply from new capacity before aluminium prices rise to rmb13,900-14,000 a tonne.

Therefore, under the background of suppressed electrolytic aluminum output and improved demand, the price of aluminum should be treated with more ideas, with a target of 14,000 yuan/ton. Whether better performance follows depends on how new supply follows up.