Morgan Stanley has upgraded its outlook for the aluminum sector, citing stronger-than-expected demand from energy storage systems (ESS) and ongoing supply challenges due to power issues. As a result, the firm now sees greater earnings growth potential for CHINAHONGQIAO (01378), prompting it to raise the target price from HK$30.6 to HK$44.7 and reiterate its "Overweight" rating and top-pick status.

First, Morgan Stanley highlights a significant rise in aluminum demand driven by ESS and consumer electronics. ESS adoption has accelerated sharply, with its share of China's total battery installations jumping from 25% in June to over 40%. The firm expects this high-growth trend to continue. Factoring in casting, foil, and component needs, Morgan Stanley estimates that every 100GWh of ESS capacity consumes 160,000 tons of aluminum. Global ESS capacity is projected to reach 600GWh in 2025, up from 350GWh in 2024, with a further 50% or more growth expected in 2026. For 2025 alone, ESS-related aluminum demand is forecast at 960,000 tons (a 71.4% year-on-year increase), rising to 1.44 million tons in 2026. Combined with demand from electric vehicles, appliances, and power cables, this could drive over 2% growth in overall aluminum consumption.

Second, supply constraints pose challenges. Morgan Stanley estimates global aluminum production will reach around 1.4 million tons by 2026. Indonesia, with its abundant bauxite, coal, and alumina resources, is a key new supply source. However, China's 2021 pledge to halt new coal-fired power projects overseas—part of its carbon neutrality goals—means Chinese firms must secure local partners for power supply, a process that could take 18–24 months. Consequently, despite large-scale capacity plans in Indonesia, actual output growth remains slow, with only 700,000 tons of new supply expected by 2026. Additionally, power-related disruptions have already caused production halts totaling roughly 700,000 tons globally this year, tightening supply further. Morgan Stanley anticipates a global aluminum shortage by 2026.

Low inventory levels add to the bullish case. Current aluminum stockpiles in China stand at just 600,000 tons, below the five-year historical average. Moreover, government policies aim to increase the share of molten aluminum from 77% to 90% by 2027, potentially reducing deliverable aluminum ingots in futures markets and supporting prices.