Gold prices soared!

Gold prices soared!

Gold prices soared!

[Editor's note] ESG reports have always been considered a new topic in the investment field, but many investors actually can't read them. At present, as many as 40% of A-share listed companies will regularly publish ESG annual reports, and the ESG information disclosure rate of Hong Kong-listed companies is as high as 74%, but it is not excluded that some listed companies will publish ESG reports as a routine. What is the problem? The traditional high-energy-consuming industry, electrolytic aluminum, will usher in earth-shaking new green challenges. After the power generation industry, electrolytic aluminum will become another industry to be included in the mandatory carbon market. What does this mean for companies? The interpretation of this ESG report focuses on Chinalco, the absolute leader in the domestic aluminum industry, and analyzes the business status and development potential of this giant from a sustainable perspective. 

Gold prices have soared and frequently made headlines, and outside the media spotlight, non-ferrous metals are also collectively rising, quite a momentum of "making a fortune in a muffled voice". 

Aluminum is one of them. On April 12 (Friday), the price of the main Shanghai aluminum futures contract continued to rise at the 20,000 yuan/ton mark, approaching the integer mark of 21,000 yuan, an increase of nearly 10% in more than a month. 

On the news side, there is a complex situation of interweaving long and short. The data shows that at the beginning of 2024, the demand for some aluminum products will pick up. At the same time, on March 15, China's Ministry of Ecology and Environment publicly solicited opinions on carbon emission accounting and verification guidelines for the aluminum smelting industry, which means that the electrolytic aluminum industry is expected to become the second industry to be included in the mandatory carbon market, which is bound to have a far-reaching impact on the whole industry. 

Tianyancha data shows that Aluminum Corporation of China (601600.SH) is the largest registered capital among the nine listed companies under Aluminum Group of China, and it is also an industry giant with a market value of more than 100 billion yuan. 

Aluminum Corporation of China is not only a large-scale non-ferrous state-owned enterprise, but also the only international large-scale company with a complete industrial chain in the global industry, with three core main industries of bauxite, alumina and electrolytic aluminum, spanning the upstream and downstream. In addition, in carbon, coal, power and other supporting industries, Chinalco also has a layout. 

The huge volume and extensive layout also put forward higher requirements for corporate ESG governance. The rating data shows that Chinalco's ESG performance is not outstanding, and many subsidiaries have also caused problems in corporate governance and environmental protection...... 

The ESG score is mediocre

From the perspective of market capitalization, Chinalco is the absolute leader in the industry. Among the 30 A-share listed companies in the third-level aluminum industry of Shenwan, Aluminum Corporation of China is the only company with a market value of more than 100 billion yuan, and is far ahead of the second and third Shenhuo shares (000933.SZ) and Yunlu shares (000807.SZ) with a market value of about 50 billion yuan. 

However, the level of ESG governance of Chinalco is mediocre in the industry. According to Flush ESG rating data, as of the third quarter of 2023, Chinalco's ESG rating is "BBB", with a level of 67.57 ranking sixth among 30 aluminum companies, 16th among 59 industrial metal industry companies, and 46th among 134 non-ferrous metal industry companies. 

In the ratings of Rank Top ESG at the end of March 2024, Chinalco ranked 12th out of 59 companies in the industrial metals sector. The better performance is that in the ESG rating system of China Guosen and China Securities Index, Chinalco has achieved the second place in the non-ferrous metals industry and the sixth in the industrial metals industry, respectively. 

On March 28, along with the annual report, Aluminum Corporation of China released the "2023 Social Responsibility and Environmental, Social and Governance Report". The report is nearly 100 pages long, and after introducing the company's situation and ESG management at the beginning, it is detailed in the order of G, E and S in three aspects: responsible governance, low-carbon environmental protection and innovative service development. 

What is slightly inconvenient is that, unlike most companies that disclose key performance tables at the beginning or end of ESG reports, Chinalco's report does not have a performance table that aggregates various ESG indicators, and key data are presented in the corresponding chapters. 

As a high-energy-consuming industry, Chinalco's gas emissions and energy consumption indicators have shown a trend of some data rising in 2023. 

Looking at gas emissions first, although the total carbon dioxide emissions of Scope 1 and Scope 2 have been reduced in 2023, due to the decline in the company's operating income that year, the "total carbon dioxide emissions/10,000 yuan operating income" soared from 4.04 in 2022 to 5.69 in 2023. 

Gold prices soared!

Looking at energy consumption, the same characteristics are shown. In 2023, the company's comprehensive energy consumption will decrease slightly, but the "comprehensive energy consumption per 10,000 yuan operating income" will rebound significantly from 0.97 to 1.23. In response to the decline in the performance of the above indicators to measure sustainable production efficiency, Chinalco pointed out in the ESG report that because the company focused on its main business in 2023 and reduced the impact of low-margin trading business, its operating income decreased by 22.65% year-on-year, so the indicator of reaction intensity increased. 

Gold prices soared!

Chinalco's ESG report also revealed that some emission reduction targets were not met. For example, in the case of air pollutants, the company has set a target of reducing air pollutants by 3% in 2023 compared to 2020. The completion of nitrogen oxides and soot emissions has achieved the target, but the sulfur dioxide emission has decreased by 1% compared with 2020, which is not the target. Environmental performance data also shows that sulphur dioxide emissions rose to 5.94 tonnes in 2023 from 5.56 tonnes in 2022. 

Gold prices soared!

What does inclusion in a mandatory carbon market mean?

As a high-energy-consuming industry, electrolytic aluminum is the largest sub-industry in the field of non-ferrous metals, and about 85% of carbon emissions in the production process come from indirect emissions caused by electricity consumption. 

In 2024, new environmental news will land in this high-energy-consuming industry. On March 15, the Ministry of Ecology and Environment (MEE) issued a notice to solicit public comments on the Guidelines for Accounting and Reporting of Corporate Greenhouse Gas Emissions and the Technical Guidelines for Corporate Greenhouse Gas Emissions Verification for the aluminum smelting industry. The general analysis of the market believes that a clear signal has been released, and the domestic electrolytic aluminum industry will become the second industry to be included in the mandatory carbon market after the power generation industry. 

The question is, what does this mean for companies in the industry, and what does it mean for Chinalco? 

The industry interpretation brought by "Fenxi Technology" in the column pointed out that the electrolytic aluminum and cement industries that will be included in the carbon market are all industrial production projects with relatively rigid emissions. Under a series of guidelines such as the new regulations on energy consumption of electrolytic aluminum and the energy consumption control of the carbon market, the future energy-saving optimization of the industry has become a rigid demand, which may mean that it will be more difficult for small and medium-sized enterprises to survive, and the concentration of the industry will continue to rise. 

Chinalco has a first-mover advantage in participating in the carbon market. According to the official website of Aluminum Corporation of China, as one of the world's largest suppliers of alumina and electrolytic aluminum, the company attaches great importance to the payment and implementation of carbon emission allowances for key emitting enterprises, formulates a 100% compliance work plan, and fully supports the operation of the national carbon market. In November 2023, Chinalco fully completed the quota settlement and compliance of carbon emissions in the second cycle, achieving 100% compliance in the second compliance period of the carbon market, and also completing the clearance and compliance of the Ministry of Ecology and Environment of the People's Republic of China one and a half months ahead of schedule. 

Pushing the time forward, it can also be found that Chinalco is still making up for the shortcomings of green power through industry mergers and acquisitions, laying the groundwork for sustainable development in the future. 

In July 2022, Aluminum Corporation of China announced its intention to acquire a 19% stake in Yunnan Aluminum, and announced the successful completion of the above plan in November of that year. The obvious benefit of this merger is the further consolidation of the industry's position. After the acquisition of Yunlu shares, the consolidated production capacity of Chinalco climbed to 7.7 million tons at that time, surpassing Hongqiao to become the first in the industry. 

The acquisition also lurks hidden green gains. According to the report of Minsheng Securities on July 25, 2022, the proportion of wind and solar power generation in Yunnan is 6.1% and 1.2% respectively, and the total proportion of green power is as high as 79.4% with hydropower. This means that electricity in Yunnan is not only cheap, but also green. In the context of "dual carbon", such advantages are quite significant. Therefore, after Chinalco's acquisition of Yunnan Aluminum shares, its own proportion of green electricity will be significantly increased. Adding "green color" to itself will further enhance the competitiveness of the aluminum giant, especially when it comes to cooperating with overseas companies. 

Although Chinalco's strong industry has further strengthened its industry position and green competitiveness through mergers and acquisitions, its extensive layout has also brought difficult challenges to corporate governance. 

Subsidiaries pose environmental and corporate governance challenges

From an ESG perspective, subsidiaries have had a negative impact on Chinalco's environmental protection and corporate governance. 

In terms of environmental protection, the pollution incident of subsidiaries is a problem that has plagued Chinalco for a long time. As early as 2016, Shanxi Huaxing Aluminum, a subsidiary of Chinalco, was exposed to "aluminum plant discharge, the Yellow River is in an emergency", and the pollution problem was concerned by the public. According to the "Daily Economic News" report at the time, Huaxing Aluminum caused a leakage of slurry due to technical problems, and part of the slurry flowed into the Lanyi River through the rain drainage pipe. In this regard, Chinalco insiders revealed that the company attaches great importance to this environmental protection incident and instructs Shanxi Huaxing Aluminum to speed up rectification. 

In 2017, the polluted environment of Chinalco's Lanzhou branch was reported. According to the Securities Times, the company's reply to this matter at that time was to find out the problem, quickly rectify it, and take responsibility. 

In 2022, "National Business Daily" reported that Chinalco's indirect holding subsidiary, Chinalco, Shanxi Jiaokou Xinghua Technology Co., Ltd., was subject to administrative penalties, and the reason for the punishment was still environmental protection, with a penalty amount of 1.06 million yuan. 

As a high-energy-consuming and high-polluting enterprise, controlling the green production of subsidiaries will be the theme of Chinalco's eternal need for meticulous and careful management in the future. 

In terms of corporate governance, the subsidiary has also brought negative public opinion to Chinalco. 

On January 8, Aluminum Corporation of China announced on the Hong Kong Stock Exchange that its subsidiary, Shandong Huayu Alloy Materials Co., Ltd., received the court's "Civil Ruling" and ruled to accept the creditor's application for bankruptcy liquidation. However, Chinalco stressed that because Shandong Huayu's asset scale, revenue scale and profit contribution account for a small proportion of the company's overall total, its bankruptcy liquidation is not expected to have a significant impact on the company's performance and equity. 

According to public information, Shandong Huayu was included in the consolidated scope of Chinalco's statements in 2006, and has completely stopped production since 2019, and has not been able to resume production and operation so far. 

Still the darling of the institution

Dividends are an important item of corporate governance in the company's ESG governance. From 2011 to 2020, Chinalco did not pay dividends for ten consecutive years. 

It was not until 2021 that Chinalco, whose profitability had finally been greatly improved, planned to pay 0.32 yuan per 10 shares, giving back to shareholders again after ten years. The total dividend amount of the company was about 550 million yuan, accounting for 10.7% of the net profit for the period. 

According to the inventory of the Yangtze River Business Daily, the lack of dividends in the past ten years may be related to the strong cyclicality of the aluminum industry, which directly affects the stability of the operating performance of Chinalco. Data show that from 2001 to 2007, Chinalco's operating and profit increased steadily from 5.11 billion yuan and 440 million yuan to 76.18 billion yuan and 10.23 billion yuan respectively, but the subsequent global financial tsunami hit the industry, and then from 2011 to 2016, the company continued to lose money, and only got out of the business predicament after 2017. 

Why did it get out of business difficulties in 2017 and not resume dividends until 2021? This may be related to the huge loss of Chinalco at that time. 

As a listed central enterprise, in 2014, Chinalco became the "loss king" of the entire A-share market, with an annual loss of more than 16 billion yuan in a single year, which made Chinalco suffer from public pressure. 

In that year, Aluminum Corporation of China explained in its annual report that the huge losses were mainly due to the decline in product sales prices, the provision for the impairment of large assets on some long-term assets, and the provision of dismissal and internal retirement benefits for personnel who retired internally and terminated labor relations through negotiation. 

At that time, the "Economic Information Daily" also quoted industry experts as pointing out that the huge losses of China's aluminum industry were not only related to the recession of the industry, but also due to the stubborn disease of the state-owned assets system. The report pointed out: "In any case, the huge losses of Chinalco, a central enterprise with various resource advantages, are really incredible." ” 

Such a huge loss of 10 billion yuan will require the sum of the operating profits of the following six full years to make up for it. 

From an ESG perspective, in the future, in addition to further enhancing its ability to cope with industry fluctuations, Aluminum Corporation of China needs to improve its own ESG governance capabilities to reduce the risks caused by environmental issues, shoulder the social responsibility of a "national brand" enterprise, and give back to shareholders with better corporate governance. 

Fortunately, today's Chinalco is still the darling of institutions. In April 2024, Citi adjusted its 2024 and 2025 earnings forecasts for Aluminum Corporation of China, raising its target prices for H-shares and A-shares and maintaining a "buy" rating. The agency believes that in the future, photovoltaic and new energy vehicles will stimulate aluminum demand, and the industry's profit margin will be further repaired. 

China Post Securities also gave a "buy" rating to Chinalco in its report on April 11, believing that the giant's complete aluminum industry chain has obvious advantages. The research report released by Zhongtai Securities on the same day is also optimistic about the improvement of China's aluminum resource security and becoming a participant and beneficiary of accelerating the upgrading of industrial development.

【ESG Investment Analyst Comments】

Aluminum Corporation of China:

1. The 2023 Social Responsibility and Environmental, Social and Governance Report of Aluminum Corporation of China Limited is compiled based on the Environmental, Social and Governance Reporting Guidelines of the Hong Kong Stock Exchange and the Self-Regulatory Guidelines for Listed Companies on the Shanghai Stock Exchange No. 1 - Operational Specifications. The disclosure content of the report is logically clear, which provides a certain reference for stakeholders, including investors, to evaluate the value of the enterprise and make decisions.

2. The transparency of the disclosure content is insufficient, and the reference value for decision-making is limited. The report does not mention the core tasks of the company's ESG strategy, and it is impossible to relate the ESG strategy to the company's strategic goals. This year, the company's climate target indicators have been significantly adjusted, and the basis for adjustment and the path to achieve it have not been explained. The data disclosed in the report has not been verified by a third party.

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