Nonferrous metals danced higher, aluminum led the gains, Tianfeng called “electrolytic aluminum the perfect combination of flexibility and dividends.”

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The traditional cyclical industry of electrolytic aluminum is completing its strategic transformation into a dividend-bearing asset. The latest research report from Tianfeng Securities points out that the electrolytic aluminum industry is undergoing a shift from a traditional strong cyclical commodity to a high-quality and scarce asset with "price elasticity on the upside and dividend support on the downside," calling it "the perfect fusion of elasticity and dividends."

On November 6, the non-ferrous metals sector continued its strong performance, with the leading non-ferrous ETF rising 3.22% in the intraday market, posting two consecutive daily gains. According to data from the Shenzhen Stock Exchange, the ETF has attracted continuous capital inflows for the past four days, totaling 25.79 million yuan. According to Wind data, the leading non-ferrous ETF has risen by over 70% since the beginning of the year.

Among constituent stocks, leading aluminum companies led the gains significantly. Nanshan Aluminum hit the daily limit, Chalco rose by more than 4%, and shares like Yunnan Aluminum and Shenhuo followed.

Regarding the surge in aluminum stocks, Citigroup stated that the supply of aluminum will remain tight, mainly because China has reached capacity limits and Indonesia's capacity growth is limited, pushing up the industry's long-term gross margins. The next two years will be a key period for China's electrolytic aluminum output to peak. The domestic output for 2025 is estimated at around 44.2 million tons, which has reached the capacity ceiling of 45.43 million tons. With domestic capacity fully utilized, the current electrolytic aluminum market presents a "fragile balance" situation.

At the same time, Tianfeng Securities also noted in its latest report that the traditional cyclical industry of electrolytic aluminum has gradually transformed into a high-quality, scarce asset with "price elasticity on the upside and dividend support on the downside." By the end of 2024, the weighted average dividend yield of the electrolytic aluminum sector reached as high as 6.0%, ranking first among major high-dividend sectors, with leading company China Hongqiao having a staggering 13.7% dividend yield.

Tianfeng Securities states that this transformation is fundamentally due to dual improvements in the supply side and capital structure. Domestic electrolytic aluminum capacity has approached the policy ceiling of 45 million tons, with a capacity utilization rate of 97.5%, and the supply cap is starting to have a real constraining effect. Meanwhile, the industry’s capital expenditure peak has passed, and free cash flow has significantly improved, laying the foundation for continued high dividends. Under the logic of supply and demand pricing, the industry is expected to maintain high profits for the long term.

Dividend Yield Leads the Market: From Cyclical Stocks to Dividend Assets

The dividend yield performance of the electrolytic aluminum sector has surpassed traditional high-dividend sectors such as coal, oil & petrochemicals, and banks.

According to Tianfeng Securities estimates, the sector’s weighted average dividend yield is 6.0% for 2024, significantly higher than coal’s 4.6%, oil & petrochemicals’ 4.2%, and banks’ 4.7%. Even after a substantial rise in 2025, as of September 30, the sector’s yield is still about 5%, remaining among the top sector-wide.

Leading enterprises are even more outstanding. China Hongqiao’s dividend yield for 2024 is 13.7%, with a high payout ratio maintained at 62%. Assuming the payout ratio remains unchanged, the company’s dividend yields for 2025 to 2027 are projected to be 6.5%, 6.8%, and 7.2% respectively, still among the top high-dividend leaders.

The industry-wide trend of higher dividends is very clear. After Zhongfu Industrial did not pay dividends for the past decade, in April 2025 it announced a three-year dividend commitment of not less than 60% of the annual distributable profit. Yunnan Aluminum’s interim dividend guidance for this year was raised by eight percentage points to 40%, while Tianshan Aluminum’s dividend guidance rose by nine percentage points to 50%. This collective increase in dividends reflects the industry’s fundamental strategic shift from scale expansion to shareholder returns.

Reshaping the Supply and Demand Landscape: Capacity Constraints and Demand Resilience

2025 is a crucial turning point for electrolytic aluminum supply. As of the end of September, domestic electrolytic aluminum completed capacity and operating capacity reached 45.72 million tons and 44.56 million tons, respectively, and capacity utilization had risen to 97.5%, just a step away from the 45 million ton policy cap. This marks the biggest difference from previous cycles.

A systematic decline in output growth rate has already appeared. In 2024, China's electrolytic aluminum output grew by 4.1% year-on-year. For January to September 2025, output reached 33.07 million tons, with year-on-year growth dropping to 2.7%. Mysteel predicts the full-year 2025 output at 44.34 million tons, up 2.6% year-on-year, far lower than last year.

Uncertainties in overseas supply also provide support on the supply side. According to Aladdin statistics, from 2025 to 2027, planned new overseas capacity totals 25.18 million tons, with Indonesia accounting for 45% or 11.23 million tons. However, these projects face major constraints due to relatively poor infrastructure and power shortages. Calculated with a power consumption of 13,500 kWh per ton of aluminum, Indonesia's planned full capacity operation would consume 15.16 billion kWh, accounting for 44.2% of Indonesia's 2024 power generation.

The demand side is undergoing structural optimization. In 2024, transportation replaced real estate as the largest downstream sector for aluminum, accounting for 24.8%. Power accounted for 18.5%, and together these two accounted for 43.3%, an increase of 3 percentage points year-on-year.

From January to September 2025, China's new energy vehicle production increased by 34.8% year-on-year, and the increase in aluminum usage per vehicle supported demand for automotive aluminum. The "Implementation Plan for High-Quality Development of the Aluminum Industry (2025-2027)" clearly calls for "expansion of key directions for aluminum consumption," and aluminum application scenarios are expected to continue to expand.

Tight supply and demand is fundamentally changing the pricing mechanism for electrolytic aluminum. Reviewing trends since 2020, since 2022 there’s been a marked divergence between aluminum and cost trends. In the fourth quarter of 2024, alumina prices fluctuated dramatically, but aluminum prices remained relatively stable, reflecting the dominant role of supply-demand pricing logic.

Under this logic, the central level of aluminum prices is expected to rise steadily, and volatility is likely to narrow. The current industry average profit per ton of aluminum remains between 4,000 and 5,000 yuan, and high profits are expected to last for a long time.

Optimizing Capital Structure: End of Spending Peak Releases Cash Flow

Since 2021, capital expenditure intensity in the electrolytic aluminum sector has been at a relatively low historical level. Constrained by the domestic capacity red line and uncertainty of overseas expansion, the peak period of large-scale capital expenditures by electrolytic aluminum companies has ended. Presently, capital expenditures are mainly related to integrated layouts, green power construction, and relocation and technical upgrades. In the future, the capex center is expected to trend downward.

With improving cash flows and decreasing capital expenditures, major electrolytic aluminum companies’ free cash flow has improved significantly. Using the simple calculation of net cash flow from operating activities minus capital expenditures, major aluminum companies have maintained consistently positive and expanding free cash flow in recent years, creating conditions for improving shareholder returns.

The electrolytic aluminum sector has entered a deleveraging cycle since 2021. Most enterprises have seen both their asset-liability ratios and interest-bearing debt ratios decline, and financial cost rates have dropped significantly. For example, China Hongqiao had an asset-to-liability ratio of 49.1% in the first half of 2025, an interest-bearing debt ratio of 33.1%, and a financial cost rate of 1.6%, all at healthy levels.

Asset quality has also been significantly optimized. The impairment size at leading company Chalco has declined significantly since its peak in previous years, and asset impairment for other electrolytic aluminum companies has returned to a relatively low level since 2022. Looking at depreciation and amortization, in recent years all companies have shown a declining trend in the proportion of depreciation and amortization to total profit. With the downward trend in capital expenditure, that ratio is expected to decline further.

Tianfeng Securities particularly emphasizes that ROE stability is a necessary condition for dividend value. The agency reviewed the dividend market trend in the coal sector:

From November 2023 to June 2024, the coal sector diverged from coal prices and achieved an independent dividend market, with the price-to-earnings ratio rising from 7.8 times to 12.2 times. But later, as fundamentals deteriorated, coal returned from a dividend to a cyclical character.

Compared to coal, electrolytic aluminum has a more favorable market structure due to rigid supply constraints. Aluminum prices are expected to rise steadily, and high profits are expected to last for a long cycle. In recent years, aluminum companies’ ROE volatility has narrowed. With expectations of steady aluminum prices and converging volatility, ROE stability is expected to improve and extend, meeting the necessary conditions for dividend value.

Risk Warning and DisclaimerThe market is risky, and investment should be done cautiously. This article does not constitute personal investment advice and has not considered individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing based on this information is at your own risk. ```