The recent report from Citic Securities has raised significant discussions in the financial and commodities markets, specifically concerning the dynamics of alumina prices and their cascading effects on the aluminum industryWith the current landscape marked by a softening demand-supply balance, several catalysts are contributing to a notable decline in alumina prices.

As of the end of 2024, the rising prices of alumina have significantly pressured the profitability metrics within the electrolytic aluminum sectorAccording to SMM's calculations, the average profit for the electrolytic aluminum industry has plummeted to a staggering -1383 RMB per ton, representing the lowest figure since 2020. This steep decline is painting a concerning picture for stakeholders and investors alike, highlighting a sector under strain.

The year 2025, however, brings a wave of optimism with projections suggesting a gradual decrease in alumina prices

This anticipated decline, coupled with stable aluminum prices, holds the promise of a recovery in profit margins within the industryInvestor sentiment appears increasingly bullish, particularly given the dual boosts from enhanced dividend payouts and improved valuations in the aluminum sector.

Citic Securities highlighted a few essential points in its analysisThe softening supply-demand dynamic is being further exacerbated by several catalyst eventsFor instance, a report dated January 3 indicated that transportation issues affecting major mining companies in Guinea’s Boké region have been resolved, allowing these operations to normalizeAdditionally, companies in the Boffa region are on a trajectory to resume operations with their shipping activities, paving the way for increased supply flowsIn Shanxi, local alumina enterprises are gearing up to restart their roasting furnaces, which is projected to yield an additional output of approximately 2700 tons per day by the end of the month if all goes according to plan.

On a broader scale, the offshore departure of bauxite from key ports, along with improved import data at significant domestic ports, signals a recovery in operational capacity ratios for alumina to electrolytic aluminum in China

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For instance, as of January 2, total inventories of alumina have reached 3.029 million tons, marking an increase since the latter half of 2024 and indicating a shift toward a more balanced inventory position.

The report further anticipates that alumina prices are likely to stabilize at lower levels heading into 2025. With predictions framing the domestic production of alumina to reach an estimated 11.3% increase in new capacity by the end of 2025, the rebalancing of the market seems plausibleSpecific production increments broken down quarterly suggest a steady state of new capacity entering the fray, which should moderate pricing pressures.

Additionally, a global perspective showcases an increase in bauxite mining capacitiesWood Mackenzie estimates that the new bauxite supplies from Guinea alone will amplify by 12.71 million tons, contributing to a total global increase of 22.02 million tons

This uptick in mining capacity could help stabilize prices further.

Demand forecasts also present a dual narrativeThere is a prediction of a sharp decline in the growth rate of electrolytic aluminum production in China, with the sector projecting only 1.7% growth in demand juxtaposed against a 3.1% anticipated increase in supplyThis shift from a negative balance of -1.68 million tons in 2024 to a slight surplus of 10,000 tons in 2025 indicates that the market might be hitting its stride amidst a recovering backdrop.

The horizon seems promising, with expectations that ongoing infrastructure investments and the growth of the renewable energy vehicle sector could fortify demand against potential downturns in real estateA high elasticity in demand is envisaged for the electrolytic aluminum market, maintaining the equilibrium at a relatively tight range of -150,000 tons by the end of 2025, with prices projected to oscillate between 19,500 and 22,000 RMB per ton.

Looking forward, Citic Securities expresses optimism regarding the profit margins per ton of aluminum and the continuing push for enhanced dividend distributions

The aluminum sector stands to benefit from a broad recovery in profitability alongside increasing valuations, suggesting a strong investment narrative for 2025. The underlying financials, coupled with the momentum of dividends, present a compelling value proposition for investors exploring the aluminum market.

However, the report does not shy away from highlighting potential risks that could derail these optimistic projectionsA resurgence of electrolytic aluminum production overseas, outpacing expectations, could exacerbate supply dynamics unfavorablyFurthermore, if the growth in downstream demand fails to meet projections or if the anticipated rise in dividend payout ratios from Chinese aluminum firms falls short, values might stagnateThe constant monitoring of valuation shifts within these companies remains crucial for investors aiming to navigate this ever-evolving landscape.

This narrative encapsulates a sector poised at the intersection of change, with fluctuations in alumina prices serving as the critical fulcrum affecting aluminum production and its profitability