AP/Daniel R. Patmore
An Alcoa worker inspects an aluminum roll in Indiana.
As China works to reduce pollution and energy costs, aluminum manufacturers have the opportunity to end a decade-long slump.A report from Morgan Stanely suggests that new environmental policy and financial conditions could dramatically cut aluminum production in China, providing opportunities for metals and mining companies elsewhere in the world.
Researchers at Morgan Stanley estimate that stocks in metals manufacturers Alcoa, Nanshaan, Chalco, Norsk Hydro, South32, Hindalco, and Vedanta are overweight and carry a 23% average upside potential.
A reduction in China's aluminum production would be welcome among metals and mining producers, since this would open a door for companies around the world to meet the drop in supply from shuttered Chinese plants.
Metals and mining stocks have fallen across the board over the last several years. BlackRock's iShares Global Metals & Mining Producers ETF was launched in 2012 to a price of $52.50, but today sits at $27.
The Morgan Stanley report notes that China's aluminum industry has not been profitable and that it is a heavy contributor to pollution, but it appears that China is ready to take action.
As part of China's Winter 2017 Air Quality Pollution Prevention Plan, the State Council said that "producers must cut aluminum capacity and production of electrolytic aluminum by more than 30 percent across the 28 cities in winter, and some cities like Shijiazhuang and Tangshan in Hebei province, China's top steel-producing province, will have to cut their iron and steel output in half."
In addition, the US - under the Obama administration - launched a complaint against Chinese aluminum subsidies with the World Trade Organization earlier this year.
China's 2017 Beijing-Tianjin-Hebei Air Quality Pollution Prevention Working Plan estimated that the rest of the world needs to supply additional capacity to meet its 2-3% annual demand growth instead of relying on Chinese exports. That could mean big business for metals manufacturers.