CITIC Securities: The Indonesian project may change the global alumina cost curve and continue to be optimistic about investment opportunities in the electrolytic aluminum industry

The Zhitong Finance App learned that CITIC Securities released a research report saying that thanks to its rich aluminum-coal resources, Indonesia has become a hot spot for the global aluminum industry. Local bauxite costs have a prominent advantage, but there is no significant advantage in energy prices. The bank estimates that the return on investment in aluminum electrolytic in Indonesia is at a limited level, but the return advantage of alumina should not be underestimated. It predicts that Indonesia's alumina/electrolytic aluminum production capacity will increase by an average of 32/560,000 tons per year from 2025 to 30. The bank believes that the commissioning of the Indonesian project will not change the downward trend in the growth rate of electrolytic aluminum production, but it will change the global alumina cost curve and continue to be optimistic about investment opportunities in the electrolytic aluminum industry.

CITIC Securities's main views are as follows:

Resource endowment: Abundant aluminum-coal resources, low grid interconnection, no significant advantage in electricity prices.

Indonesia is a major country with aluminum and coal resources. Bauxite reserves and production rank fourth and fifth in the world, and coal reserves and production rank seventh and third in the world. The degree of grid interconnection and regional balance in Indonesia is low, and the electrolytic aluminum project is highly dependent on self-owned electricity. Indonesia's coal pricing is highly international. Compared with China's equivalent calorific value price, the price of industrial electricity is 0.49 yuan/kilowatt hour, and the comprehensive cost of building a self-owned power plant is 0.55 yuan/kilowatt hour, which has no advantage over China.

Project inventory: The average annual increase in Indonesia's alumina/electrolytic aluminum production capacity is expected to reach 32/560,000 tons in 2025-30.

In terms of alumina, the bank expects that with the successive construction and operation of projects such as Inalum, Nanshan Aluminum, Jinjiang Group, Qili Aluminum, and Halita Group, Indonesia's alumina production capacity will increase from 4 million tons/year to 25.2 million tons/year, corresponding to a CAGR of 35.9%, with an average annual increase of 3.2 million tons/year. In terms of electrolytic aluminum, the bank expects that with the upgrade of Inalum Kuala Tanjung, the Mempawah project, Huaqing Aluminum, Nanshan Aluminum, Adaro PT KAI, Xinfa Group Juwan Aluminum, and Taijing Aluminum, successive operations, in 2025 to 2030, Indonesia's electrolytic aluminum production will reach 88/180/245/255/300/3.75 million tons, corresponding to an increase of 35/93/65/10/45/750,000 tons.

Return calculation: The return on investment in electrolytic aluminum is relatively limited, but the return advantages of alumina should not be underestimated.

In terms of alumina, thanks to tax relief and significantly superior bauxite costs, the cost of alumina at 450 US dollars and the current bauxite price is 388/417/289 US dollars/ton in China, 417/289 US dollars/ton, and the payback period is 8/15/5 years. At an alumina price of 375 US dollars, the payback cycle for the Indonesian project is still at the level of 8-9 years, while the Chinese project is at a loss. Generous returns may accelerate the construction of alumina production capacity in Indonesia.

In terms of electrolytic aluminum, at the price of 2,600/450 US dollars of electrolytic aluminum/alumina, domestic and Indonesian electrolytic aluminum costs are 2354 /2,613 US dollars/ton. At the same time, considering Indonesia's capital expenditure, which is 279% higher than China's, the payback period for both is 3/12 years. The price of aluminum needs to reach 2,800 to 3,000 US dollars, thus reducing the recovery cycle of the Indonesian project to a good level.

Supply outlook: The Indonesian project will not change the downward trend in the growth rate of electrolytic aluminum production, but it will change the global alumina cost curve.

The bank predicts that in 2025-30, the growth rate of global electrolytic aluminum production will be 3.2%/1.7%/2.1%/0.9%/0.6%/1.0%. It is difficult for Indonesia's electrolytic aluminum project to reverse the downward trend in global production growth. Compared with electrolytic aluminum, Indonesia's alumina industry has more unique advantages, and project construction may advance more rapidly. The bank expects that with the commissioning of low-cost production capacity in Indonesia, the total cost center of alumina in China and Indonesia will shift from 3030 yuan/ton to 2,840 yuan/ton. The cost curve will change. Imported mineral capacity from Shanxi and Henan on the right will accelerate removal, industry profits will also narrow, and enterprises will need to maintain cost and profit competitiveness through adjustments such as relocation and technical reform.

Risk factors:

The risk that the construction and commissioning of the Indonesian aluminum electrolytic aluminum project will exceed expectations; the risk that the profit level of domestic companies will fall; the risk of global trade disputes worsening; the risk that electrolytic aluminum production capacity in other overseas regions will exceed expectations; the risk that downstream demand for electrolytic aluminum will not grow as expected; the risk of rising global energy costs; and the risk of disturbances in the supply of raw materials at the mine end.