The electrolytic aluminum industry Cobre Panama moment is near

▍The copper-aluminum ratio widens, sector valuations remain low, and aluminum prices and valuations are expected to rebound.

In terms of prices, since 2025 (as of November 7), copper prices have increased by 16.7%, while aluminum prices have only risen by 9.6%. Correspondingly, the domestic copper-aluminum ratio has risen from 3.69 at the beginning of the year to 3.97, exceeding the past 20-year average plus one standard deviation level (3.84). Reviewing the copper-aluminum price trends over the past 20 years, the copper-aluminum ratio has broken through the average plus one standard deviation level seven times, during which aluminum prices have outperformed copper prices by an average of 6-7%. We believe that the new high in the copper-aluminum ratio is expected to significantly enhance the upward elasticity of aluminum prices.

In terms of valuation, based on Wind's consensus expectations (as of November 7), the average forecast PE and PB valuations for domestic electrolytic aluminum sector companies for 2025 are 13.4 times and 2.3 times, significantly lower than the copper sector's 17.1 times and 3.5 times, as well as the non-ferrous metals sector's 20.6 times and 3.1 times. The electrolytic aluminum sector is at the lowest level in the non-ferrous metals industry, with a PE valuation having a 30% rebound potential compared to the copper sector.

▍Supply disruptions are rising, and the aluminum industry "Cobre Panama" moment may be near.

In November 2023, the Cobre Panama copper mine (accounting for 1.5% of global production) was shut down due to community and policy impacts, becoming a key turning point for supply expectations in the copper industry. Subsequently, the consensus on the scarcity of copper mine supply has significantly solidified, leading to a clear divergence in copper and aluminum prices and sector valuations. We believe that similar community policy risks, production accident risks, and unique electricity supply risks are emerging in the electrolytic aluminum industry, with supply disruptions becoming significantly more pronounced, and the "Cobre Panama" moment may be approaching. The key disruption events to focus on in the future are as follows:

1. Southern 32 Mozal electrolytic aluminum project: On August 14, Southern 32 announced that if sufficient and affordable electricity cannot be obtained, the Mozal aluminum plant is expected to enter maintenance mode when the current agreement expires. The Mozal aluminum plant's production in 2024 is expected to be 493,000 tons, accounting for about 0.7% of global capacity.

2. Century Aluminum Grundartangi electrolytic aluminum project: On October 21, Century Aluminum announced that due to electrical equipment failure, one of the two production lines in the Grundartangi aluminum smelter in Iceland was suspended. This shutdown reduced the smelter's output by about two-thirds. The project is expected to produce 308,000 tons in 2024, with this incident affecting capacity by about 200,000 tons/year, accounting for about 0.3% of global capacity.

3. Rio Tinto Tomago electrolytic aluminum project: On October 28, Rio Tinto announced that as the existing power purchase agreement expires in December 2028, and it is difficult to obtain electricity at commercially viable prices, Australia's largest Tomago aluminum smelter may be forced to shut down. The project's capacity is 590,000 tons, accounting for about 0.8% of global capacity

4. Other projects: The Rio Tinto Bell Bay project (190,000 tons/year) has a one-year power supply agreement with Hydro Tasmania, but uncertainty has delayed its implementation, and the 10-year long-term agreement expected to be in place by the end of 2026 still carries uncertainty; the Boyne project (570,000 tons/year) has a power supply agreement with Gladstone Power Station that will expire in March 2029, and there is also uncertainty regarding alternative power sources.

▍The long-term substitution effect of data centers is also worth noting.

According to IEA forecasts, from 2024 to 2030, global electricity consumption by data centers will increase from 460 TWh to over 1000 TWh, with a CAGR of 13.8%, and its share of global electricity will rise from 0.2% to 1.0%. Both data centers and electrolytic aluminum plants rely on stable and low-cost electricity supply.

On one hand, if the electricity consumption growth rate of AI in certain regions significantly exceeds the growth rate of electricity installed capacity, it may lead to an increase in electricity prices in regions with existing electrolytic aluminum production, thereby increasing uncertainty regarding the renewal of contracts for electrolytic aluminum plants.

On the other hand, data centers may have a substitution effect in attracting investment from governments in emerging regions and influencing corporate investment decisions, which could affect the subsequent deployment of electrolytic aluminum production capacity. The immediate impact of data centers is relatively limited, but the long-term effects are worth paying attention to.

▍Supply constraints continue to strengthen, and profitability and valuation in the aluminum sector are expected to rise.

We expect that considering the shutdown of Mozal and not accounting for the production cuts at Grundartangi, the global electrolytic aluminum production growth rates from 2025 to 2030 will be 3.2% / 1.7% / 2.1% / 0.9% / 0.6%. In our previously released report titled "Metals Industry: In-Depth Report on the Aluminum Industry - Four Dimensions Driving the Investment Value of the Aluminum Industry" (2024-08-01), we emphasized the logic of slowing aluminum supply, increasing profitability, rising dividends, and valuation recovery. The constraints on electrolytic aluminum production capacity are continuously strengthening, and the gradual slowdown of overseas project ramp-ups is becoming a common expectation. Signs of supply disruptions have already emerged, and the consensus on the scarcity of supply in the aluminum industry is expected to deepen, with industry valuations likely to rise from the current lowest PE level of 13 times for the non-ferrous metals sector.

Authors of this article: Ao Chong, Bai Junfei, Chen Jianfan, Source: CITIC Securities Research, Original Title: "Metals | The Moment for Cobre Panama in the Electrolytic Aluminum Industry is Approaching"

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