The aluminium market is heading into a period where demand growth is expected to outpace supply, Wilsons Advisory says, with one Aussie pure-play producer likely to benefit.
In a research note sent to clients this week, Wilsons said the resources sector in general appears to be returning to growth after a three-year downturn, with the exception of gold, which has been performing strongly through the cycle.
The multi-year downtrend in resources (with the notable exception of gold) has been largely driven by pessimism over China's growth outlook – particularly weakness in its property sector, which remains central to demand for iron ore. While China's economy may slow further, investor sentiment seems to be improving, supported by easier monetary policy and rising credit availability.
There were also several global trends, such as the energy transition, growth in data centre builds, and increased defence spending, which were supporting the notion of an upturn in resources generally, Wilsons said.
Aluminium shortfalls loom
On aluminium specifically, Wilsons said the market was likely to be unbalanced in favour of producers, with demand likely to outstrip supply.
After nearly two decades of persistent oversupply driven by China's substantial capacity additions, this balance has structurally shifted as new supply appears unlikely to match China's previous additions to keep up with rising consumption.
The demand outlook is being driven by both traditional and emerging drivers, Wilsons said.
Construction, packaging, machinery, electronics, and automotive applications continue to provide a stable base of industrial consumption. On top of this, structural demand drivers are becoming increasingly significant, including the energy transition (electric vehicles, renewables), rising defence spending, growing demand for AI-related infrastructure, and the continued substitution of plastics and copper for aluminium. Together, these factors should support strong and resilient demand for aluminium over the coming years.
Wilsons said supply growth was likely to remain subdued, with smelters needing large amounts of reasonably priced energy to be viable, which was difficult, particularly in markets where data centres were willing to pay more to lock in power supplies.
Therefore, limited future Chinese supply additions, combined with constrained power availability, will restrict supply and push the global cost curve higher over time. Overall, sustained demand growth and limited new supply additions are expected to widen market deficits and drive the cost curve structurally higher, supporting firmer aluminium prices.
Where to invest on the ASX?
Wilsons said from a portfolio perspective, "this backdrop warrants an overweight exposure to aluminium".
Wilson's preferred exposure on the Australian share market is Alcoa Corporation (ASX: AAI), "the only pure-play aluminium company listed on the ASX, thereby offering the greatest leverage to aluminium prices''.
Alcoa boasts a high-quality, vertically-integrated portfolio and a proven track record of operational excellence. over the medium to long term.
