Metals have also not escaped the variations and volatility following the outbreak of the war in Ukraine. Aluminum is one of the metals on which Morgan Stanley's experts are focusing their attention, since the decline it has registered in recent weeks leaves an attractive risk-reward ratio for the second half of 2022.

"China and the rapid increase in aluminum production have influenced prices on the Shanghai stock exchange and led to increased arbitrage by the UK authorities," they tell the study report.

Preliminary data for March added to market concerns as Chinese exports of unwrought aluminum and aluminum products totaled 594,000 tons, bringing first quarter exports to a record high, as reported by Morgan Stanley.

"We note the increase in export volumes, but state that the aluminum market will remain tight due to resilient demand, an expected deficit of 2 million tons in 2022, and the lowest London Metal Exchange (LME) inventories since 2001," they note.

The lack of supplies following the sanctions against Russia and after the latter turned off the tap further strains the balance between supply and demand, in addition to high energy prices. All this endangers imports to the Old Continent.

For all these reasons, they conclude that despite the setback offered by aluminum, it continues to have an attractive risk-reward potential for the second half of 2022.

The metal sector is in the eye of the storm after the outbreak of the war. One only has to look at what happened to nickel, whose quotation had to be suspended by the LME temporarily and has imposed limits on prices, at around $45,000.

"This rise was strongly influenced by strengthening fundamentals, as demand from electric vehicle manufacturers has increased rapidly. Inventories have decreased, while premiums, an indicator of shortages in the physical market, have increased. In addition, there are concerns that the market may lose access to Norilsk' s nickel units , which account for 9% of global supply," noted Bank of America (BofA) analyst Michael Widmer at the time, noting that "neither Norilsk nor nickel have been directly affected by sanctions, but concerns about logistics and payments persist."

According to Natixis, Russia produces 42.8% of the world's palladium, 14.2% of platinum, 8.4% of nickel, 6% of aluminum and 4% of copper. "Despite the fact that Russia only produces 4% of copper, banning its exports could lead to a large price spike due to supply tensions."

POSITIVE STOCK BIAS

"We believe equity investors have positioned themselves (at least in part) for increased Chinese production, as evidenced by the discounted multiples of aluminum stocks," they insist at Morgan Stanley. These analysts look to Norsk Hydro, which trades at about $2,400 per tonne in perpetuity based on discounted cash flow, 25% below the spot $3,210 per tonne.

On the other hand, Hydro appears to be better positioned in the current environment thanks to its world-class energy mix, compelling self-help story, sustainability leadership, as well as its return on equity outlook backed by a spot free cash flow yield of 11%. For all these reasons, they reiterate their 'Top Picks' rating and remain buyers on dips.

Rio Tinto is another stock offering operating leverage to its positive aluminum outlook through its EBITDA of approximately 20% in 2022 to aluminum/alumina/bauxite. "The stock currently trades at a spot free cash flow yield of 14% and the company is well placed to deliver an attractive return on equity in 1H2022 results, supported by its net ash balance," they sentence.

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