Goldman Sachs: Accelerating Aluminum Supply Leads to Downgrade of China Aluminum to Sell

Overview

Goldman Sachs released a research report noting that driven by high industry profits, both domestic and overseas aluminum capacity expansion has markedly accelerated, prompting a more cautious outlook for future aluminum prices and industry profitability. Accordingly, the firm advanced its valuation benchmark to 2027 to account for downside risks, subsequently downgrading China Aluminum’s H-share and A-share ratings to “Sell” and cutting China Hongqiao’s target price while retaining a “Neutral” rating. The report argues that although short-term export increases may support domestic aluminum prices, deteriorating supply-demand fundamentals remain the primary concern.

Core views

Supply-side acceleration exceeds expectations: Through discussions with industry advisors, the report found that both domestic and international aluminum supply expansions are speeding up. Domestically, factors such as restarting idle smelters, utilizing old quotas, and net additions from replacement projects suggest effective capacity will surpass 48 million tons by end-2026, with an additional 3.3 million tons of production expected between 2026 and 2027—double prior forecasts. Internationally, Indonesia and Central Asia are projected to add 6 million tons of capacity from 2026 to 2028, with Indonesia’s 2026–2027 production growth revised upward by nearly 80% to 2.9 million tons. Price and profit pressures mounting: While industry profits remain elevated in the first half of 2026, the release of new supply in the second half will likely lead to corrections in price spreads and profit margins. Goldman Sachs maintains its forecast for the Shanghai-London aluminum price spread, projecting it to fall from 8,879 yuan/ton in early 2026 to around 7,000 yuan/ton by mid-year, further narrowing to 4,250 yuan/ton by 2027. Although export increases in April-May due to widening domestic-international price differentials provide some short-term support for domestic aluminum prices, the firm believes fundamental shifts continue to dominate downside risks. Individual stock ratings and valuation adjustments: To reflect potential 12-month price declines, Goldman Sachs shifted its valuation benchmark from 2026 to 2027. Calculations indicate that for every 2,000 yuan/ton reduction in the Shanghai-London aluminum price spread, China Aluminum’s earnings would drop by 37%, while China Hongqiao’s earnings would decline by 23%. Consequently, China Aluminum’s H/A-share ratings were downgraded to “Sell,” with target prices slashed to HK$7.5/Rmb7.8 (based on 2027 10x/12x PE); China Hongqiao retained a “Neutral” rating, though its target price was reduced to HK$26.0 (based on 2027 10x PE). The firm’s earnings forecasts for the Chinese aluminum sector lag market consensus by 8%–56%.

Analysis framework

The report employed a typical “supply-driven” cyclical analysis framework. First, high-frequency industry surveys and expert interviews verified capacity expansion progress, revealing actual supply growth far exceeding model assumptions. Next, incremental supply figures were plugged into supply-demand balance sheets to project contraction paths for price spreads and processing margins. Finally, sensitivity analyses quantified how changes in key variables—such as aluminum price spreads—affect specific companies’ earnings, enabling forward pricing of anticipated future profit declines. This analytical approach emphasizes monitoring marginal supply-side shifts during cyclical peaks rather than merely focusing on current high profits.

Methodology notes

• Industry/sector analysis frameworkSupply-demand framework

  Marginal supply-side changes drive cycle assessments

  During periods of high commodity profits, demand tends to remain relatively stable, making unexpected supply-side accelerations—such as restarts or faster expansions—the primary drivers of peak cycles. This report overturned earlier assumptions about sustained high profits by revising upward projected supply increments.

• Valuation methodologyPB valuation

  Historical P/B vs. ROE regression valuation

  For highly cyclical resource stocks, PE valuations can be distorted by earnings volatility. The firm adopted a method combining historical correlations between price-to-book ratios and return on equity, adjusting appropriate P/B multiples downward when ROE is expected to decline amid cyclical downturns, thus arriving at more conservative target prices.

• Corporate fundamentals and financial frameworkEarnings Sensitivity Analysis

  Earnings sensitivity analysis

  By calculating the impact of unit changes in key variables—such as aluminum price spreads—on net profits (e.g., a 2,000 yuan/ton drop in spreads corresponds to a 37% earnings decline), the firm gauged each company’s exposure to cyclical downturns. This helps identify which firms face greater performance downside risks during industry slumps.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Aluminum (2600.HK / 601600.SS)

  Downgraded to Sell: As the industry leader, highly sensitive to aluminum price and spread fluctuations, with oversupply posing the greatest threat to earnings

  Strengths

  One of China’s largest producers of aluminum and alumina, with a complete industrial chain

  Weaknesses

  Excessively earnings‑elastic; during cyclical downturns, earnings plunge by 37%, significantly worse than peers; large implied downside in valuation

  Comparison

  Compared to China Hongqiao, China Aluminum’s earnings are far more sensitive to aluminum price changes (37% vs. 23%), hence the priority downgrade under oversupply expectations

  Risks

  Sharp drops in aluminum and alumina prices; unexpected overseas capacity expansions; rising recycled aluminum supply

• China Hongqiao Group (1378.HK)

  Retained Neutral rating but lowered target price: Though facing similar industry headwinds, comparatively more resilient than China Aluminum

  Strengths

  Strong cost-control capabilities; earnings less sensitive to aluminum price swings

  Weaknesses

  Still operating within an oversupplied industry environment, with recurring profits expected to decline by 40% in 2027

  Comparison

  Compared to China Aluminum, China Hongqiao demonstrates better earnings stability, justifying its retention of a Neutral rating rather than a downgrade during the downturn

  Risks

  Fluctuating aluminum prices; policy changes limiting capacity ceilings; weaker-than-expected green demand

Key data

• Projected additional aluminum production in China for 2026–20273.3 million tonsDouble previous estimates, primarily driven by restarts, utilization of old quotas, and replacement projects
• Projected increase in Indonesian aluminum production for 2026–20272.9 million tonsNearly 80% higher than previous forecasts
• Forecasted Shanghai-London aluminum price spread for 2027E4,250 yuan/tonSignificantly narrowed from 8,879 yuan/ton in early 2026, reflecting expectations of profit compression
• China Aluminum earnings sensitivity-37%For every 2,000 yuan/ton reduction in the Shanghai-London aluminum price spread, earnings are expected to decline by this percentage
• China Hongqiao earnings sensitivity-23%For every 2,000 yuan/ton reduction in the Shanghai-London aluminum price spread, earnings are expected to decline by this percentage

Impact & implications

The report concludes that the aluminum industry is entering a phase of rapidly expanding supply, rendering current high-profit levels unsustainable. Investors should beware of valuation traps associated with cyclical stocks at peak performance. China Aluminum, being more sensitive to aluminum prices and carrying larger implied downside in its valuation (around 27%-28%), faces greater adjustment pressures; meanwhile, China Hongqiao, despite also confronting profit erosion, exhibits slightly stronger resilience thanks to cost advantages and valuation buffers. Overall, the aluminum sector’s return potential over the next 12 months has turned negative.

Risks

• Aluminum and alumina prices remaining elevated due to improved supply-demand balance
• Slower-than-expected expansion of non-Chinese aluminum projects, constraining global supply
• Faster-than-expected growth in China’s new energy vehicle and renewable energy sectors
• Lower-than-expected supply of recycled aluminum

What to watch

• Actual progress of domestic aluminum capacity deployment and resumption of idle facilities
• Construction and commissioning schedules for Indonesian and Central Asian aluminum projects
• Changes in the Shanghai-London price ratio and trends in China’s aluminum exports
• Real-world demand pull from downstream sectors like new energy and power grids