Aluminium’s role in the energy transition has arguably been overlooked compared to other critical minerals, with the metal being a key input in electric vehicles, solar installations and energy grid infrastructure.
Much like copper, aluminium is an important industrial metal that is widely used in transportation, construction, and electrical applications, alongside growing usage in ‘future facing’ applications.
Accordingly, aluminium benefits from a similar demand profile to copper, which has historically underpinned a strong correlation between the prices of each metal.
Therefore, given our conviction in the outlook for copper demand, we are similarly favourable towards the long-term demand outlook for aluminium.
This report discusses the attractive long-term supply/demand outlook for aluminium, and explores our preferred exposure: South32 (S32) (Focus Portfolio 3%).
Energy Transition is the Key Long-term Driver of Demand
Aluminium is leveraged to the energy transition thematic, as a metal that is required extensively for electric vehicles and renewable energy projects.
Electric vehicles are more aluminium intensive than conventional vehicles
Given aluminium is a key component of electric vehicles (EVs), the metal’s future demand will be bolstered by the global rollout of EVs. There is a large runway for growth, with EVs expected to represent more than 60% of new cars sold in 2030.
While aluminium is used in both EVs and internal combustion engine (ICE) vehicles, EVs have ~30% more aluminium content than ICE vehicles, meaning growth in the penetration of EVs will drive an upward inflection in demand for aluminium from the transportation sector in the future.
As an inherently lightweight metal, aluminium is used by EV and ICE producers for vehicle ‘light weighting’, which improves vehicle range for EVs and the fuel efficiency outcomes of ICE vehicles.
Solar panels are primarily made of aluminium
Due to its superior corrosion resistance, aluminium is a significant input in solar installations, with with material makeup of solar panels comprising of more than 85% aluminium. The global solar market is expected to expand at a CAGR of ~12% to reach more than US$450 billion by 2030, which will be another driver of significant demand for aluminium in the long-term.
Aluminium role in electrification is overlooked
The electrification thematic will be a major driver of aluminium demand. Although electricity demand has been flat for a long time, it is expected to ramp up over the next few decades. Along with EVs, the exponential growth of data centres, aided by the rapid onset of energy-intensive AI usage, will underpin future demand.
This dramatic shift in energy usage is exacerbated by ageing energy grid infrastructure. With many grids more than half-a-century old, they need to be modernised or replaced, while further capacity will also need to be built-out.
While copper is widely appreciated as an important metal for the electrification thematic, aluminium will also play an important (although less appreciated) role given it will be needed for the global energy grid to be upgraded and expanded.
Aluminium has some key advantages that will drive an increased shift towards its usage:
- As aluminium is much lighter than copper, its use is preferable in areas such as high voltage overhead power lines.
- Premium aluminium alloys offer greater corrosion resistance, which is crucial for longevity, especially as grids aren’t often replaced.
- Governments and companies can save immense amounts on costs, as aluminium is less expensive.
Therefore, both copper and aluminium are poised to be significant ‘electrification winners’.
Supply Dynamics Have Structurally Improved
China has capped its smelting capacity
The single most important development in the aluminium market in the last 20 years is China’s introduction of a cap to its aluminium smelting capacity to 45 mtpa. This will be a meaningful headwind to global supply growth, noting China has contributed to more than 80% of incremental production over the past two decades.
The cap was introduced due to emissions tightening in China. While it was introduced back in 2017, China didn’t have the capacity to reach this limit until 2022. Since then, China has remained committed to the cap, which provides confidence in it remaining the status quo going forward.
The rest of the world will struggle to fill the void left by China
With China’s supply capped, it is unlikely that the rest of the world will be able to replicate China’s capacity additions, with only moderate supply growth and smelter restarts in the pipeline outside of China.
The key supply additions over the next three years will come from Indonesia, which is expected to add ~2mt to capacity (Adaro, Inalum and Shandong Nanshang). The other key capacity addition will be capacity restarts in the EU, which has shuttered significant capacity in recent years due to high power costs and alumina prices.
However, restarts in the EU are likely to be gradual amidst high energy costs and elevated alumina costs which are likely to persist over the near-term (amidst bauxite shortages).
Everything considered, global capacity growth is likely to be constrained and outpaced by demand over the medium-term, which is central to our expectation of growing structural deficits over the balance of this decade.
Aluminium Market Outlook – Best in 15 Years
With growing deficits expected over the medium and long-term, the outlook for aluminium prices is positive, which is driving industry forecasts of higher aluminium prices over the coming years.
While higher prices should theoretically incentivise increases to global supply, this will be constrained by the limited ability of the rest of the world to make up for China’s plateauing supply growth.
Everything considered, from a supply/demand perspective, the aluminium sector is in the best place it has been in more than a decade. While aluminium continues to have cyclical features (much like copper), the metal is also supported by powerful secular growth tailwinds from the energy transition.
Near Term Dynamics Are Improving
Like other industrial commodities, the aluminium market is currently in oversupply amidst a slowdown in global economic growth in 2023/4 and headwinds facing China's property/construction sectors. However, the current de-stocking cycle is likely to end in the near-term, with a return to restocking expected in 2025 which should push the market into deficit (see figure 4). This dynamic is supportive of aluminium prices over the near to medium-term (see figure 5).
Moreover, aluminium is likely to be a beneficiary of further Chinese stimulus announcements over the near-term. While this isn’t central to our thesis for the aluminium market, from a portfolio management perspective we are cognisant this could trigger a broad-based commodity rally, which would benefit aluminium alongside other commodities like copper and iron ore.
South 32 is Our Preferred Aluminium Exposure
S32 provides significant leverage to the aluminium price
Rio Tinto (RIO) and South32 (S32) are the two major aluminium producers at the larger end of the ASX.
S32 is our preferred exposure to the commodity over RIO, given its greater skew towards the metal and its lack of exposure to iron ore (where we remain structurally cautious). S32 provides the greatest exposure across the aluminium supply chain, including bauxite, alumina, and aluminium.
S32’s aluminium production is growing
S32’s aluminium and alumina production are forecast to increase at a steady pace over the medium-term, with incremental alumina driven by Worsley and Brazil (alumina) and incremental aluminium driven by Mozal and Alumar Brazil.
S32 Is Pivoting Towards ‘Future Facing’ Commodities
Central to S32’s strategy has been its pivot towards ‘future facing’ critical minerals that are essential for the energy transition, and its divestments from commodities with weaker structural demand outlooks like coal.
S32 has ‘cleaned’ up its product mix
In recent years, S32 has exited its thermal and metallurgical coal operations, which in addition to improving its commodity mix has strengthened its balance sheet.This will free up capital for other projects, including its Hermosa project.
Located in Arizona, the Hermosa mine will produce zinc and manganese - two designated critical minerals used in batteries, with nameplate production targeted for FY30. Hermosa’s Clark deposit is the only advanced project in the US likely to produce battery-grade manganese, which has resulted in the US Department of Energy granting S32 with US$166 million for the project.
The development of the project's Taylor zinc-lead-silver deposit achieved final investment decision during the year and is progressing as planned. Hermosa is expected to deliver a multi-decade production profile and sits in the first quartile of the cost curve.
The addition of zinc to the product mix further steers S32’s exposure to future facing metals, with zinc’s properties of protecting against corrosion making it a key mineral in wind and solar technology.
Furthermore, S32 acquired a 45% interest in the Sierra Gorda (Chile) copper operations in February 2022. Copper should provide more immediate growth, with management recently calling out the potential to increase production by 15% in FY25 and 6% in FY26. S32 has expressed interest in further M&A to expand its copper footprint.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
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