According to the report released by Jefferies Financial, it has initiated a "buy" rating on China Hongqiao (01378) and Aluminum Corporation of China (02600), with target prices of HKD 12.20 and HKD 5.20, respectively. Jefferies Financial points out that the aluminum market in China will be in a state of supply and demand tension, which will support higher premiums and returns in the coming years. The demand from electric vehicles and photovoltaics is a new driving force that offsets the decline in the construction industry. Secondly, supply constraints will continue to exist, and the supply shortage needs to be filled by recycling. The recent weakness in aluminum prices is seasonal and provides a good buying opportunity.

The growth in demand and supply limitations mean that the market is in a tight balance. Jefferies Financial predicts that Chinese aluminum demand (including recycled aluminum) will grow by 5.9%/2.5%/2.2% in the fiscal years 2024/25/26. Even if the growth in demand from electric vehicles (38%/23%/12% in 2024/25/26E) and photovoltaics (25%/17%/15% in 2024/25/26E) slows down, Jefferies Financial expects them to contribute an annual increase of 1.2 million to 1.7 million tons of aluminum consumption, enough to offset the decline in demand from the construction industry. Jefferies Financial predicts that transportation and electrical utilities demand will surpass the construction industry in 2024-25, becoming the top two downstream demand sectors, and together will account for more than 50% of the total demand in 2026, compared to around 40% before the pandemic. Meanwhile, the construction industry may decrease from over 30% to about 20%, and its impact will weaken over time. In terms of supply, as of the first half of 2024, China has produced a capacity of 44.9 million tons, with a utilization rate of 96%, very close to its capacity ceiling of 45.5 million tons. Jefferies Financial believes that this upper limit is unlikely to be lifted in the short term. Although recycled aluminum can serve as additional supply, Jefferies Financial predicts that its stable annual growth will be less than 1 million tons, which is not expected to cause a serious market surplus.

Jefferies Financial also points out that despite recent adjustments, the long-term outlook for aluminum prices is optimistic. Since June, aluminum prices have fallen due to weak demand momentum, as it enters the off-season and Yunnan resumes full production. The destocking of Chinese social inventories is also behind its typical seasonal levels. However, with the arrival of the peak season in September and October, if Yunnan, like in the past three years, requests production cutbacks due to tight power supply in the winter, prices may gradually rise by the end of the year. Looking further ahead, stable demand growth and the tight balance of the market caused by capacity limitations support a constructive price outlook. Jefferies Financial's global team predicts prices of USD 1.12/1.20/1.25 per pound (CNY 19800/21200/22100 per ton) for the years 2024/25/26, respectively.