Metals have also been affected by thefluctuations and volatility following the outbreak of war in Ukraine.Aluminumis one of the metals that Morgan Stanley experts are focusing on, as the decline it has experienced in recent weeks leaves anattractive risk-rewardratio for the second half of 2022.
"China and the rapid increase in aluminum productionhave influenced prices on the Shanghai Stock Exchange and led to an increase in arbitrage by the British authorities,"the study report states.
Preliminary data for March heightened market concerns, asChinese exports of raw aluminum and aluminum products rose to 594,000 tons, bringing first-quarter exports to a record high, according to Morgan Stanley.
"We note theincrease in export volumes, but we affirm that the aluminum market will remain tight due to resilient demand, a projected deficit of2 million tons in 2022, and the lowest London Metal Exchange (LME) inventories since 2001," they note.
The lack of supplies resulting from sanctions against Russiaand after it turned off the tap further strains the balance between supply and demand, compounded by high energy prices. All of this jeopardizes imports to the Old Continent.
For all these reasons, they conclude that despite the decline in aluminum,it continues to offer an attractive risk-reward ratiofor the second half of 2022.
The metal sector is in the eye of the storm following the outbreak of war. Just look at what happened to nickel, whose trading had to be temporarily suspended by the LME, which has imposed price limits of around $45,000.
"This increase was greatly influenced by stronger fundamentals, as demand from electric vehicle manufacturers has risen rapidly. Inventories have declined, while premiums, an indicator of tightness in the physical market, have increased. In addition, there are concerns that the market may lose access toNorilsk'snickelunits,which account for 9% of global supply," said Michael Widmer, an analyst at Bank of America (BofA), at the time, while noting that "neither Norilsk nor nickel have been directly affected by the sanctions, but concerns about logistics and payments remain."
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. "Although Russia only produces 4% of copper, banning its exports could cause a sharp rise in prices due to supply tensions."
POSITIVE BIAS OF THE SHARES
"We believe that equity investors have positioned themselves (at least in part) forincreased production in China, as evidenced by the discounted multiples of aluminum stocks," Morgan Stanley insists. These analysts are looking at Norsk Hydro, whichis trading at around $2,400 per tonnein perpetuity based on discounted cash flow,25% below thespotprice of $3,210per tonne.
On the other hand, Hydro appears to bebetter positioned in the current environment thanks to its combination of first-class energy, attractive self-help story, leadership in sustainability, and capital return prospects backed by an 11% free cash flow yield. For all these reasons, they reiterate their'Top Picks'rating and remain buyers on dips.
Rio Tintois another stock that offers operational leverage to its positive outlook for aluminum through its EBITDA of approximately 20% in 2022 for aluminum/alumina/bauxite. "The shares are currently trading at a cash free cash flow yield of 14%, and the company is well positioned to deliver attractive returns on capital in the first half of 2022, supported by its net ash balance," they conclude.
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