Aluminum production accounts for approximately 3% of global carbon emissions each year, and the race to reduce such pollution is “well underway,” according to Goldman in a research note published on Thursday. The metal is used in the production of everything from airplanes to laptop computers.
The analysts wrote in a note titled “The Race for Green Aluminium: Upgrading Prices & Picking Green Winners” that they have “little doubt that investors should view aluminium as in the early stages of a multi-year bull market,” citing rising demand and “progressively larger” supply deficits.
Firms that can reduce their emissions will see a “green premium” in their stock prices, with some making billions of dollars from new green technology, according to Goldman.
Goldman Sachs rates Alcoa as a buy, increasing its earnings per share estimates for the year by 14% and by 30% for 2023 due to rising aluminum prices. The bank also likes Alcoa’s debt reduction plans and increased focus on green targets, and it added that new green technology produced by the company “could potentially be worth billions of dollars” to the firm.
Hydro, a Norwegian company, is also rated as a buy due to its sector-leading earnings growth and green initiatives such as recycling and investment in battery technology, which the analysts believe offer “significant upside.” Goldman did not provide EPS estimates, but it increased its forecast for earnings before interest, taxes, depreciation, and amortization by 22% for this year.
Goldman chose Russian producer Rusal, which is planning to spin off its older, higher-emitting smelters into a separate company, and raised its EPS estimates for the year by 9 percent, rising to a 29 percent increase in 2022. The bank is pleased with its “strong earnings momentum.”
South32, an Australian mining company, is expected to increase its earnings per share by 1% this year and 20% by 2023, according to Goldman Sachs. While the bank stated that the company is not doing as well as its peers in terms of reducing emissions, it remains a buy due to its “strong” free cashflow outlook and likely increase in dividend returns.
“With the likely increase in green metal premia driven by customer demand, we believe that companies that can reduce their emission intensity may attract a valuation premium versus peers.” In contrast, as we discussed in our Mining to Net Zero report, we believe investors will penalize companies that do not reduce absolute emissions and/or emissions intensity and/or meet targets,” Goldman analysts said.
Companies are planning to reduce emissions by producing aluminum using hydropower.
A competitive market
Aluminum prices are expected to reach their highest level since the late 2000s, when they traded around $3,000 per metric ton, according to Goldman. “The team raised their 12-month target to US$3,000/t from US$2,650/t, implying a near-20% increase from spot,” the bank’s analysts wrote.
“The team anticipates that the first half of the 2020s will have the lowest five-year period for global primary metal supply growth in nearly 40 years. This will be set against a green-enhanced demand environment, which will result in an extension of what has been a very strong decade for aluminum consumption in the 2010s into the 2020s,” the analysts added.
The bearish size of “green” vehicles
UBS reduced its Tesla price estimate by about 10 percent by blaming increased competitive pressure and operational delays.
“Our key concern in the short term is that Tesla’s demand momentum in China is slowing, and our checks on the ground suggest that [battery electric vehicles] from domestic brands are gaining further ground vs. Tesla, which may trigger additional pricing action by Tesla and, as a result, lower gross margins,” UBS’ Patrick Hummel wrote in a note released Monday.
Hummel kept his neutral rating on the stock and lowered his price target to $660 from $730. The new price target represents a 4% drop from the stock’s Monday closing price of $688.72.
According to FactSet, the average 12-month price target for Tesla is $689.72.
Hummel’s price target reduction comes just days after a “soft recall” of autopilot software in over 285,000 Chinese vehicles.
According to UBS, Tesla is still regarded as the “undisputed EV leader” around the world. The firm does note, however, that legacy manufacturers and Chinese brands are making progress.
“In terms of value, EV launches from competitors with high range, charging performance, and attractive value-for-money could continue to weigh on the market’s willingness to assign to Tesla’s long-term growth,” Hummel said.
Hummel also anticipates that delays in Tesla model and product launches will have an impact on investor sentiment toward the stock.
Tesla gained 10.2 percent in June as investors returned to growth stocks. In 2021, the stock of electric vehicles is down 2.4 percent.