Power supply constraints, "substituting aluminum for copper" to stimulate demand, Morgan Stanley is optimistic about aluminum's rally, with a target directly at $3,700!

The global aluminum market is undergoing a supply-side transformation driven by electricity.

According to Wind Trading Platform, on March 2nd, Morgan Stanley’s Amy Gower research team released a report stating that although current aluminum prices have reached Morgan Stanley’s Q2 benchmark forecast of $3,250 per ton, Morgan Stanley remains bullish, with a full-year 2026 bull market target price of $3,700 per ton.

The research report emphasizes that the global aluminum supply is facing systemic constraints primarily due to “electricity scarcity.” The current forward curve for aluminum has increasingly developed a “spot premium” structure, with physical premiums rising across the globe, and LME inventories have been steadily declining since November last year.

On the demand side, factors such as copper-aluminum substitution and manufacturing upgrades continue to support growth. The current copper-to-aluminum ratio remains above 4 times, a historical high, indicating significant “catch-up” potential for aluminum relative to copper.

China’s capacity reduction targets have been achieved, marking the end of the global supply increase era

As the world’s largest aluminum producer, China’s self-imposed capacity cap has become the cornerstone of market tightness.

In 2025, China’s electrolytic aluminum production is expected to reach 45.2 million tons, up from 44 million tons in 2024, but it has already hit its self-set capacity limit of 45-45.5 million tons per year. This signals the end of the rapid expansion cycle since 2007.

(China’s capacity restrictions have taken effect, with 2025 output at 45.2 million tons)

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) increased by 400,000 tons compared to the previous year, while exports decreased by 510,000 tons, resulting in a net export reduction of about 910,000 tons.

With domestic growth limited, industry focus shifts toward internal upgrades.

Leading Chinese companies, including China Hongqiao, China Power Investment, and China Aluminum, are accelerating the construction of high-current capacity with 600kA electrolytic cells to replace outdated capacity. WoodMac estimates that this year, about 900,000 tons of such replacement capacity will be added, rising to approximately 4 million tons by 2027. This indicates ongoing capacity optimization but limited contribution to net supply.

Indonesia’s rise is a highlight, but electricity bottlenecks set the ceiling

After China’s capacity peaked, Indonesia has become the most important source of global aluminum supply growth, driven directly by substantial Chinese capital.

Morgan Stanley tracks about 4 million tons of capacity under construction in Indonesia, led by Chinese companies such as Xinfa, Adaro, and Nanshan Group. By 2026, Indonesia’s aluminum production is expected to surpass 1.5 million tons, a 105% increase over 2025, contributing about 79% of the global smelting capacity increase. Global smelting output is projected to rise from 74.3 million tons in 2025 to 75.3 million tons in 2026.

However, this growth faces severe electricity constraints. The new capacity in Indonesia is highly concentrated, and the regional grid’s redundancy capacity is far below demand. Hydropower resources have potential but are developing slowly, with most basic load relying on coal-fired power. The report specifically notes that some under-construction capacity in Adaro and Nanshan is still awaiting power supply, which depends on the progress of thermal power self-generation.

Additionally, aluminum smelting driven by thermal power faces carbon emission risks. If the EU’s Carbon Border Adjustment Mechanism (CBAM) extends to Scope 2 emissions in the future, Indonesia’s aluminum export competitiveness could be significantly weakened, squeezing smelter profit margins.

More concerning is a plan for an additional 800,000 tons of new capacity on Hamahera Island, progressing in two phases of 400,000 tons each. Equipment orders are complete, but delivery takes about 21 months. However, if nickel profits decline more than aluminum, BlueScope Group might switch some nickel lines’ power supply to aluminum production, potentially exceeding current estimates of actual output.

U.S. data centers and smelters compete fiercely for electricity

More dramatically, in the U.S. market, traditional aluminum smelters are being ruthlessly pushed out of the grid by tech giants.

Since 2015, the average industrial electricity price in the U.S. has increased by 24.9%. In this context, about 1.4 million tons of smelting capacity have been shut down.

(Decline of the U.S. aluminum smelting industry)

Meanwhile, tech companies are signing power contracts for new data centers at prices exceeding $100 per MWh, while aluminum smelters can only afford about $40 per MWh—several times less. Smelters are losing the competitive battle in the electricity market.

Facing this downward pressure, giants like Alcoa and Century Aluminum are directly selling idle plants to data centers.

On the import side, in March 2025, the U.S. imposed a 50% tariff under Section 232 on primary aluminum imports. Since then, monthly imports have decreased by about 77,000 tons compared to pre-tariff levels, while scrap aluminum imports increased by only about 16,000 tons, far from enough to fill the gap. This means the U.S. market has been consuming inventories at a rate of about 61,000 tons per month.

(Post-tariff, left chart: U.S. aluminum imports decline by an average of 77,000 tons/month; right chart: scrap imports increase by 16,000 tons)

Midwest aluminum premiums have risen to $1.04 per pound, higher than the theoretical level of about $0.98 per pound based on tariffs, and above Europe’s current level of about $0.16 per pound, indicating some buyers are beginning to re-enter the market. However, analysts note that if Canadian aluminum enters Europe duty-free, the U.S. could still see further premium increases to compete for Canadian supplies.

Europe’s supply gap is quietly widening, premiums hit new highs

The European aluminum market is experiencing multiple supply pressures simultaneously.

Russia’s aluminum import ban officially took effect in March 2026. Prior to that, a transition quota allowed about 275,000 tons of imports over the past 12 months. With the quota ending, supply sources in Europe have shown a clear gap.

Meanwhile, South32’s Mozal smelter in Mozambique confirmed it will close in March. In the first 10 months of 2025, the plant exported about 430,000 tons of aluminum to Europe, roughly 20% of Europe’s primary aluminum demand.

South32 management explicitly stated during earnings calls that, due to the inability to secure electricity contracts at economically feasible prices (around $50 per MWh), with Eskom quoting about $100 per MWh, the plant has no choice but to go into maintenance mode.

As a result, European aluminum premiums have surged, with tax-included premiums reaching about $360 per ton—the highest since late 2022. The gradual realization of the CBAM’s impact on the carbon cost of aluminum imports will continue to exert upward pressure on premiums in future negotiations.

The only somewhat alleviating news comes from Iceland. Century Aluminium’s Grundartangi plant, previously shut down due to electrical issues, is expected to restart in April—about six months earlier than expected. However, considering the plant’s aluminum shipments are projected to decline by about 21.8% to 215,000 tons in 2026, the relief to the European market will be limited.

Middle East geopolitical risks: low probability but potential shocks cannot be ignored

The Middle East situation presents an asymmetric upside risk to the aluminum market.

On the data front, the Middle East accounts for about 9% of global aluminum production, mostly for export. However, the region produces only about 3% of global alumina and 1.2% of bauxite, heavily relying on imports of raw materials to sustain smelting operations.

This means that any disruption to shipping through the Strait of Hormuz—whether affecting aluminum exports or raw material imports—could have dual impacts on global aluminum supply.

Meanwhile, rising energy prices driven by Middle East tensions will also transmit through cost curves, affecting global aluminum smelting profitability.

Copper-aluminum ratio exceeds 4x, substitution trend still ongoing

Morgan Stanley forecasts that China’s aluminum demand will grow by 2% year-over-year to 46.1 million tons in 2026, surpassing China’s own capacity limit, with the gap needing to be filled by imports.

Demand-side support factors include the new five-year plan (2026-2030), which allocates 4 trillion RMB (~$600 billion) for grid upgrades—an increase of 40% over the previous five-year period. Although solar photovoltaic installations are expected to decline, aluminum consumption in concentrated solar power (CSP) projects, which require more than twice the aluminum of PV, aims to reach 15 GW by 2030 (currently only 1.7 GW).

(Solar energy demand has peaked but still has room for growth)

The current copper-aluminum ratio remains above 4 times, at the high end of its historical range, and Morgan Stanley believes this ratio provides important relative valuation support for further aluminum price increases.

(LME copper to aluminum ratio)

Theoretically, when the copper-aluminum ratio exceeds certain thresholds, some industrial applications that traditionally use copper may switch to aluminum.

The most obvious substitution opportunity is in HVAC (heating, ventilation, and air conditioning). Under equal current-carrying capacity, aluminum conductors require a cross-sectional area 1.6 times that of copper, which limits substitution in space-constrained applications. However, in HVAC and other applications with more space, aluminum substitution is accelerating.

Meanwhile, in the aluminum can market, aluminum’s position remains strong, even gaining market share from plastics and other materials, driven by consumer preferences for sustainable packaging.

Morgan Stanley maintains a bullish outlook with a target of $3,700

Based on a comprehensive structural view of supply and demand, Morgan Stanley explicitly maintains a bullish stance on aluminum, even though current prices have already reached their Q2 forecast of $3,250 per ton.

Morgan Stanley’s core points are:

• Supply side: China’s capacity cap, slowing Indonesian growth, and power constraints in Europe and the U.S. smelting sector create structural supply pressure;
• Demand side: U.S. destocking cannot continue indefinitely; buyers will eventually return to primary aluminum; European demand driven by the auto industry grew about 4% YoY in January; copper-aluminum substitution continues;
• Price catalysts: Significant catch-up potential for aluminum prices relative to copper; further deterioration of Middle East stability could trigger additional supply tightening;
• Cost curve reshaping: As alumina prices decline and aluminum prices rise, smelting profit margins are expanding, but about 50% of global smelting capacity relies on third-party power contracts, with rising electricity costs being the most persistent restraining factor.

(Decoupling of alumina and aluminum prices will boost smelter margins)

According to Morgan Stanley’s forecast:

2026 baseline: Aluminum price around $3,088 per ton (average for the year);

Q2 baseline: $3,250 per ton;

2026 bull scenario: $3,700 per ton;

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