The global aluminum market is undergoing a supply-side transformation driven by electricity.
According to news from the Wind Trading Desk, on March 2, Morgan Stanley's Amy Gower research team released a report stating that although current aluminum prices have reached Morgan Stanley's second-quarter benchmark forecast price of $3,250 per ton, Morgan Stanley remains bullish, with a target price of $3,700 per ton for the full year 2026.
The research report emphasizes that the global aluminum supply side is facing systematic constraints primarily characterized by &#34;electricity scarcity.&#34; The current forward curve for aluminum is increasingly showing a &#34;spot premium&#34; structure, with physical premiums continuing to rise globally and LME inventories declining since last November.
On the demand side, multiple catalytic factors such as copper-aluminum substitution and manufacturing upgrades continue to provide support. The current copper-aluminum price ratio remains above four times its historical high, indicating a significant &#34;catch-up&#34; space for aluminum relative to copper.
<h2>China's capacity reduction targets achieved, signaling the end of the global supply increment era</h2>
As the world's largest aluminum producer, China's self-imposed capacity limit has become the cornerstone of a tight market balance.
China's electrolytic aluminum production is expected to reach 45.2 million tons in 2025, an increase from 44 million tons in 2024, but it has reached its self-imposed capacity limit of 45 million to 45.5 million tons per year. This signifies the end of the rapid expansion cycle that began in 2007.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/1b1187dd-813c-497a-a3cd-4e54142fd9f4.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/1b1187dd-813c-497a-a3cd-4e54142fd9f4.png"/> (China's capacity restrictions have taken effect, with a production of 45.2 million tons in 2025)
The impact of capacity reduction is reflected in trade data. In 2025, China's aluminum-related imports (primary aluminum, alloys, scrap aluminum, and semi-finished products) are expected to increase by 400,000 tons compared to the previous year, while exports are expected to decrease by 510,000 tons, resulting in a net export reduction of approximately 910,000 tons.
With domestic growth constrained, the industry focus has shifted to internal upgrades.
Leading Chinese companies, including China Hongqiao, State Power Investment Corporation, and China Aluminum Corporation, are accelerating the construction of new high-current intensity capacities represented by 600kA electrolytic cells to replace outdated capacities. Woodmac estimates that this year, such alternative new capacities will be approximately 900,000 tons and will climb to about 4 million tons by 2027. This indicates that capacity structure optimization is still underway, but its contribution to net supply is limited.
<h2>Indonesia's rise is a highlight, but electricity bottlenecks determine the ceiling</h2>
After China's capacity peaks, Indonesia has become the most important source of global aluminum supply increment, driven by significant direct investment from Chinese capital.
Morgan Stanley has tracked approximately 4 million tons of construction capacity in Indonesia led by Chinese capital, including core projects from Xinfa Group, Adaro, and Nanshan Group. In 2026, Indonesia's aluminum production is expected to exceed 1.5 million tons, an increase of about 105% compared to 2025, and is expected to contribute 79% of the global smelting production increment. Global smelting production is expected to rise from 74.3 million tons in 2025 to 75.3 million tons in 2026.
However, this growth outlook faces severe constraints from electricity supply. The new aluminum production capacity in Indonesia is highly concentrated, and the redundant capacity of the local power grid is far from meeting demand. Although hydropower resources have potential, the development progress is slow, and most of the basic load will rely on coal-fired power. The report specifically points out that some of the construction capacity at Adaro and Nanshan is still waiting for supporting power supply, which depends on the construction progress of self-built thermal power plants.
In addition, aluminum smelting driven by thermal power also faces carbon emission risks. If the European Union's Carbon Border Adjustment Mechanism (CBAM) includes Scope 2 emissions in its control in the future, Indonesia's aluminum export competitiveness will be significantly weakened, compressing the profit margins of smelters.
More concerning is an additional plan for 800,000 tons of new aluminum production capacity on Hamahera Island, which will be advanced in two phases of 400,000 tons each. Power equipment has been ordered, but the delivery cycle will take about 21 months. However, if nickel profits decline more than aluminum by that time, Qing Shan Group may switch some of the power from nickel production lines to aluminum production, resulting in actual output contributions exceeding current estimates.
<h2>Power Struggle Between Data Centers and Smelters in the U.S.</h2>
More dramatically, in the U.S. market, traditional aluminum smelters are being ruthlessly &#34;squeezed&#34; out of the power grid by tech giants.
Since 2015, the average price of industrial electricity in the U.S. has increased by 24.9%. Against this backdrop, about 1.4 million tons of smelting capacity has been successively shut down.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3feef177-add4-44fc-b239-1d280e3675bf.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/3feef177-add4-44fc-b239-1d280e3675bf.png"/> (The decline of the U.S. aluminum smelting industry)
At the same time, the electricity contracts signed by tech companies for new data centers have prices exceeding $100 per megawatt-hour, while aluminum smelters can only bear prices of about $40 per megawatt-hour, a difference of several times, leaving smelters powerless in the electricity market.
Faced with this dimensionality reduction attack, giants like Alcoa and Century Aluminum have chosen to sell idle sites directly to data centers.
On the import side, the U.S. imposed a 50% tariff on primary aluminum imports under Section 232 in March 2025, resulting in an average monthly import volume decreasing by about 77,000 tons compared to before the tariff was implemented, while scrap aluminum imports only increased by about 16,000 tons, far from making up the shortfall. This means that the U.S. market has been consuming inventory at a rate of up to 61,000 tons per month.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/cace785d-3fe9-4fde-8cd3-d97d20d08921.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/cace785d-3fe9-4fde-8cd3-d97d20d08921.png"/> (After the tariff implementation, left: U.S. aluminum import volume decreased by an average of 77,000 tons per month, right: scrap imports increased by 16,000 tons)
The Midwest aluminum premium has currently risen to 104 cents per pound, higher than the theoretical level of about 98 cents per pound based on tariff levels, and higher than the corresponding indicator in Europe, which is currently about 16 cents per pound, indicating that some buyers have begun to return to the market. However, analysts point out that since Canadian aluminum enters Europe tariff-free, if the U.S. wants to compete for Canadian supplies, the premium still has room for further increases
<h2>The Supply Gap in Europe Quietly Expands, Premiums Continue to Reach New Highs</h2>
The European aluminum market is currently experiencing a situation where multiple supply pressures are overlapping.
The ban on Russian aluminum imports officially took effect in March 2026. Prior to this, a transitional quota arrangement allowed for the import of approximately 275,000 tons over the past 12 months. With the termination of this quota system, a significant gap in European supply sources has emerged.
At the same time, the Mozal smelter in Mozambique, owned by South32, has confirmed it will close in March. This plant exported about 430,000 tons of aluminum to Europe in the first 10 months of 2025, accounting for approximately 20% of Europe's primary aluminum demand.
The management of South32 clearly stated during the earnings release that the plant had no choice but to enter maintenance mode due to the inability to secure power contracts at economically viable prices (around $50/MWh), while the power supplier Eskom quoted around $100/MWh.
Against this backdrop, the European aluminum premium has significantly rebounded, with the tax-inclusive premium currently around $360/ton, reaching its highest level since the end of 2022. The gradual visibility of carbon costs for aluminum imports under the CBAM will continue to exert upward pressure in future premium negotiations.
The only slightly relieving news comes from Iceland. The Grundartangi plant, owned by Century Aluminium, had previously halted production due to electrical faults, but the latest news indicates that production will resume in April, about six months earlier than expected. However, considering that the plant's aluminum shipment volume is expected to decline by approximately 21.8% year-on-year to 215,000 tons in 2026, the relief effect on the European market is limited.
<h2>Geopolitical Risks in the Middle East: Low Probability but Potential Impacts Cannot Be Ignored</h2>
The situation in the Middle East provides an asymmetric source of upside risk for the aluminum market.
From a data perspective, the Middle East contributes about 9% of global aluminum production, with the vast majority being exported. However, the region itself only produces about 3% of the world's alumina and 1.2% of bauxite, heavily relying on raw material imports to maintain smelter operations.
This means that any disruption to shipping safety in the Strait of Hormuz, whether affecting aluminum exports or interrupting raw material imports, will have a dual impact on global aluminum supply.
At the same time, the rising energy prices driven by the Middle East situation will also have a transmission effect on the profitability of global aluminum smelting through the cost curve.
<h2>Section Six: Copper-Aluminum Ratio Exceeds 4 Times, the &#34;Substituting Aluminum for Copper&#34; Trend is Not Over</h2>
Morgan Stanley predicts that China's aluminum demand will maintain a year-on-year growth of 2% in 2026, reaching 46.1 million tons, which exceeds China's own production capacity limit, necessitating imports to fill the gap.
Supporting factors on the demand side include the planned investment of 4 trillion yuan in grid upgrades in the new five-year plan (2026-2030), a 40% increase compared to the previous five-year plan. Although the expected installation of solar photovoltaic systems is declining, aluminum consumption is set to exceed more than twice that of concentrated solar power (CSP), which has an aggressive target of reaching 15GW by 2030 (currently only 1.7GW)
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/038b09c8-2718-430b-a71e-23724b078bce.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/038b09c8-2718-430b-a71e-23724b078bce.png"/> (Solar demand has reached past peaks, but still has room for further growth)
The current copper-aluminum price ratio is still above 4 times, at the high end of the historical range, and Morgan Stanley believes this ratio provides important relative value support for further increases in aluminum prices.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d39f85fe-8805-426c-b093-705a66f0ece2.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d39f85fe-8805-426c-b093-705a66f0ece2.png"/> (LME copper and aluminum ratio)
Theoretically, when the copper-aluminum price ratio exceeds a certain threshold, the use of copper in some industrial applications will shift to aluminum.
The most obvious substitution opportunity currently appears in the heating, ventilation, and air conditioning (HVAC) sector. Under the same current-carrying capacity, the cross-sectional area of aluminum wire needs to be 1.6 times that of copper wire, which restricts the substitution process in space-constrained applications. However, in fields like HVAC where space requirements are relatively relaxed, the substitution of aluminum is accelerating.
At the same time, in the aluminum can sector, aluminum's market position remains solid and is even continuing to capture market share from materials like plastic, with consumer preference for sustainable packaging being the most important driving force.
<h2>Morgan Stanley Maintains Bullish Outlook, Bull Market Target of $3,700</h2>
Based on a comprehensive structural assessment of supply and demand, Morgan Stanley clearly maintains a bullish stance on aluminum in its report, even though current aluminum prices have approached its second-quarter benchmark forecast of $3,250 per ton.
Morgan Stanley's core viewpoints are as follows:
<blockquote>
<ul>
<li>Supply Side: China's production capacity is capped, Indonesia's incremental growth is slowing, and the resumption of smelting in Europe and the U.S. faces hard constraints on electricity, putting structural pressure on global supply;</li>
<li>Demand Side: U.S. destocking cannot continue indefinitely, and buyers will eventually return to the primary aluminum market; European demand is driven by the automotive industry, with a year-on-year growth of about 4% in January; the copper-aluminum substitution effect continues;</li>
<li>Price Catalysts: There is significant room for aluminum prices to catch up relative to copper; if the situation in the Middle East worsens further, it could trigger additional supply tightening;</li>
<li>Cost Curve Restructuring: As alumina prices decline and aluminum prices rise, smelting profit margins are expanding, but about 50% of global smelting capacity relies on third-party electricity contracts, and rising electricity costs are the most important ongoing suppressive factor.</li>
</ul>
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/def7d565-c660-4452-9bcf-849e1088a7db.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/def7d565-c660-4452-9bcf-849e1088a7db.png"/> (The divergence between alumina and aluminum prices will enhance smelter profit margins)
</blockquote>
According to Morgan Stanley's forecasts:
<blockquote>
2026 Benchmark Forecast: Aluminum price of about $3,088 per ton (annual average);
Second Quarter Benchmark Forecast: $3,250 per ton;
2026 Bull Market Scenario: $3,700 per ton;
</blockquote>

Morgan Stanley believes that the global aluminum supply side is facing systematic constraints characterized by "power scarcity." Currently, the forward curve for aluminum has increasingly adopted a "spot premium" structure, with physical premiums rising continuously around the world, and LME inventories have been declining since last November. On the demand side, multiple catalytic factors such as copper-aluminum substitution and manufacturing upgrades continue to provide support. The current copper-aluminum price ratio remains above 4 times, indicating a significant "catch-up" potential for aluminum relative to copper

- The global aluminum market is undergoing a supply-side transformation driven by electricity constraints, resulting in higher premium prices and declining inventory levels.  
- China, the largest aluminum producer, has capped its production, while Indonesia is emerging as a key contributor, despite facing electricity supply challenges affecting its growth.  
- Morgan Stanley maintains a bullish outlook for aluminum prices, projecting a target of $3,700 per ton in a bullish scenario for 2026, supported by ongoing demand and structural supply pressures.

Power supply constraints and "aluminum replacing copper" stimulate demand, Morgan Stanley is optimistic about the aluminum rally, targeting $3,700!