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Aluminum: Supportive sentiments, fragile fundamentals

LME Aluminum prices rallied ~5% in the past one month on macro tailwinds from a weakening US$, the looming Fed rate cut and the apparent trade war de-escalation. We find fundamentals fragile, given the lack of cost support and headwinds from tariff-led uncertainties and consequent demand destruction. The alumina price is close to a two-year low and new capacities are likely to keep the market in structural surplus. Aluminum spreads are now approaching Feb 2022 levels (start of the Russia-Ukraine war)—a record high, notwithstanding demand headwinds. We see a downside risk to aluminum prices and remain cautious on aluminum producers—NACL, VEDL and HNDL.

Macro factors propel base metal prices

The US$ has been weakening, with the DXY index down 10.4%/2% YTDCY25/1M. A weak US$ and looming Fed rate cuts have strengthened base metal prices, with LME Ali/Cu/Zinc up 5%/4%/9% in the last one month. The previous Sep 2024 Fed rate cut led to a surge in LME Ali prices by ~15%, which was gradually erased due to weaker demand.

Aluminum market in mild deficit; demand has downside risks

Global aluminum demand has been resilient in 1HCY25 (+2.7% yoy), but we expect demand to lose momentum in 2HCY25E due to the ongoing trade uncertainties and consequent demand destruction. We estimate global demand to slow down to 1.8%/1.7% in CY2025/26E from 3.7% in CY2024. Down-trending regional premiums (ex-USA) also suggest a fragile demand outlook. Production growth should slow down in China due to a capacity cap; however, we expect capacity additions in ex-China to gradually offset. We estimate the aluminum market to remain in a mild deficit of 140/90k tons in CY2025E/26E and forecast LME at US$2,550/2,600 per ton in FY2026/27E versus spot at US$2,700 per ton.

Alumina to remain in structural surplus; aluminum spreads close to record high

Alumina prices are down 50% YTDCY25 at US$341/ton (FoB Australia), led by a combination of normalizing supplies and capacity additions. Near-term supply additions in China, along with a robust capacity addition pipeline elsewhere, suggest an adequate market surplus in the medium term. We estimate alumina prices at 14-15% of LME aluminum prices over FY2026-28E, lower than the historical average. Elevated aluminum prices due to macro tailwinds and subdued costs (alumina, thermal coal) raised spot spreads to US$1,640/ton versus the long-term average of US$1,000/ton. Spot spreads are close to the record high of US$1,690/ton reached in Feb 2022 on fear of supply disruption from the Russia-Ukraine war. We estimate that 98% of global smelting capacity is profitable on a cash cost basis at current aluminum prices.

Downside risk to aluminum prices; stay cautious on producers

We see a downside risk to aluminum prices, given weak fundamentals and remain cautious on aluminum producers—NACL, HNDL and VEDL. We find better risk-reward for ferrous players over non-ferrous players due to better growth visibility, supportive trade policies and superior return profiles.

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