Alcoa Set For Gains As China's Aluminum Market Surplus Grows, Global Supply Tightens: JPMorgan

Alcoa Corp AA stock investors should be prepared for some turbulence in aluminum prices in the near term, according to insights from JPMorgan’s Commodities Research team led by Greg Shearer.

The team warns that aluminum prices, currently hovering around $2,700 per metric ton, may consolidate toward $2,450 to $2,500 per metric ton due to a growing disconnect from underlying fundamentals, much like the recent trend observed in copper prices.

Aluminum Prices Set for Near-Term Consolidation

This bearish outlook stems from a combination of factors, primarily related to the Chinese market. Despite a resilient start to the year, Chinese aluminum demand is showing signs of fatigue amid higher prices.

Recent counter-seasonal inventory builds and widening spot discounts suggest that supply is outpacing demand, leading to a surplus in the market. The resurgence of production in Yunnan and other regions is adding to this supply glut, which is expected to cap out by 2025.

Ex-China Demand Expected To Recover

On a more positive note, the JPMorgan team forecasts a rebound in aluminum prices in the longer term, driven by tightening global supply and increased demand. They expect demand outside of China to recover robustly, with a predicted growth rate of 4.7% year-on-year in 2025, particularly from sectors like construction, consumer durables, and machinery. Additionally, supply constraints and substitution demand from copper are projected to push aluminum prices back up towards an average of $2,740 per metric ton in 2025.

Alcoa’s Strategic Positioning

For Alcoa, these market dynamics present both challenges and opportunities. The company’s shares have already seen a substantial re-rating this quarter, rising 30% due to the rally in aluminum and alumina prices.

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Alcoa's strategic positioning, particularly its exposure to alumina, could make it an attractive investment as alumina markets are poised for further tightness. The planned curtailment of Alcoa’s Kwinana refinery and potential additional supply-side constraints may further tighten alumina supply, potentially benefiting Alcoa’s pricing power, the JPMorgan analysts note.

Furthermore, the likely sale of Alcoa's loss-making San Ciprian complex could remove a significant overhang, enhancing the company’s financial health. As such, Alcoa remains a solid option for investors seeking exposure to the aluminum and alumina markets, especially with an eye on the longer-term price recovery forecasted by JPMorgan.

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