Power-constrained supply and "aluminum replacing copper" stimulating demand: Morgan Stanley is bullish on aluminum’s rally, with a target set at $3,700!

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

According to Wind Trading Desk, on March 2, Morgan Stanley’s Amy Gower research team released a report stating that although current aluminum prices have already reached Morgan Stanley’s second quarter benchmark forecast of $3,250/ton, the bank remains bullish, with a full-year bull market scenario target price for 2026 at $3,700/ton.

The report emphasizes that the global aluminum supply side is encountering systemic constraints, mainly driven by "electricity scarcity." The aluminum forward curve is increasingly showing a "spot premium" structure, physical premiums continue to rise globally, and LME inventories have been declining since November last year.

On the demand side, it is supported by multiple catalysts such as copper-aluminum substitution and manufacturing upgrades. The current copper-aluminum price ratio remains at a historical high above 4x, implying significant "catch-up" potential for aluminum relative to copper.

China's Capacity Reduction Target Reached, Era of Global Supply Growth Ends

China, as the world’s largest aluminum producer, has set a capacity ceiling that has become the cornerstone of tight market balance.

In 2025, China's electrolytic aluminum output is expected to reach 45.2 million tons, an increase from 44 million tons in 2024, but already touching its self-imposed capacity cap of 45-45.5 million tons per year. This marks an end to the rapid expansion cycle since 2007.

(China’s capacity restrictions have come into effect, output for 2025 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) increase by 400,000 tons compared to the previous year, while exports decrease by 510,000 tons, resulting in a net export reduction of about 910,000 tons.

With domestic growth restricted, focus shifts to internal industrial upgrades.

Leading Chinese companies, including China Hongqiao, State Power Investment Corporation (SPIC), and Aluminum Corporation of China (CHALCO), are accelerating construction of new high-current capacity, such as 600kA electrolytic cells, to replace outdated capacity. Woodmac forecasts that such replacement capacity will be about 900,000 tons this year and will climb to around 4 million tons by 2027. This means capacity structure optimization is ongoing, but its contribution to net supply is limited.

Indonesia Emerges as a Highlight, but Power Bottlenecks Set the Ceiling

After China’s capacity cap, Indonesia becomes the most important source of global aluminum supply growth, primarily driven by direct Chinese capital.

Morgan Stanley tracks about 4 million tons of Indonesia capacity under construction dominated by Chinese groups, including Xinfa, Adaro, and Nanshan Group. In 2026, Indonesian aluminum output is expected to exceed 1.5 million tons, a growth of about 105% compared to 2025, contributing 79% of global smelting output increase. Global smelting output is expected to rise from 74.3 million tons in 2025 to 75.3 million tons in 2026.

However, this growth outlook faces severe electricity constraints. Indonesia’s new aluminum capacity is highly concentrated, and the local grid's redundant capacity cannot meet demand. Hydropower resources have potential but are slow to be developed, and most basic load will rely on coal-fired power. The report specifically notes that parts of Adaro and Nanshan’s new capacity are still waiting for supporting power sources, which depend on coal-fired captive plants under construction.

Additionally, coal-driven aluminum smelting faces carbon emission risks. If the EU's Carbon Border Adjustment Mechanism (CBAM) in future includes scope two emissions, Indonesian aluminum's export competitiveness will be substantially weakened, squeezing smelters’ profit margins.

Of further interest is an extra 800,000 tons of new aluminum capacity planned on Halmahera Island, in two 400,000 ton phases. Power equipment has been ordered, but delivery will take about 21 months. However, if nickel profits decline more than aluminum at that time, Tsingshan Group may switch some nickel line power to aluminum production, causing actual production contribution to exceed current estimates.

U.S. Data Centers and Smelters Battle for Power

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

Since 2015, average U.S. industrial electricity prices have risen 24.9%. In this context, about 1.4 million tons of smelting capacity has been suspended.

(The decline of U.S. aluminum smelting)

Meanwhile, technology companies sign power contracts for new data centers at unit prices above $100/MWh, while smelters can only tolerate about $40/MWh, several times the difference. Smelters have no power in the electricity market.

Faced with such an overwhelming blow, U.S. aluminum giants like Alcoa and Century Aluminum are selling their idle plant sites directly to data centers.

On the import side, the U.S. imposed a 50% Section 232 tariff on primary aluminum imports in March 2025. Afterward, average monthly imports dropped by about 77,000 tons, while scrap aluminum imports rose by only 16,000 tons, far short of covering the gap. This means the U.S. has been depleting inventory at a rate of up to 61,000 tons/month.

(After tariffs, left: U.S. aluminum imports down 77,000 tons/month, right: scrap imports up 16,000 tons)

Midwest aluminum premium is currently up to 104 cents/pound, above the theoretical level of about 98 cents/pound calculated from tariff levels, and higher than Europe’s similar index, now around 16 cents/pound. This shows some buyers are returning to the market. Analysts say that since Canadian aluminum enters Europe tariff-free, premiums in the U.S. may have more room to rise if competing for Canadian supply.

Europe’s Supply Gap Quietly Expands, Premiums Hit New Highs

The European aluminum market is experiencing overlapping multiple supply pressures.

Russia’s aluminum import ban formally came into effect in March 2026. Prior transitional quota arrangements allowed imports of about 275,000 tons in the last 12 months, but with that system ending, Europe's supply sources face a clear gap.

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

South32 management stated at earnings release that, unable to secure electricity at economically viable prices (about $50/MWh; Eskom quotes about $100/MWh), the facility had no choice but to enter maintenance mode.

In this context, European aluminum premium has rebounded sharply. Premium (including tax) is now about $360/ton, the highest since the end of 2022. CBAM’s increasing visibility of carbon costs for aluminum imports will continue to drive premiums higher in future negotiations.

The only slightly relieving news comes from Iceland. Century Aluminium's Grundartangi plant, previously stopped due to electrical failure, will resume production in April, about six months earlier than expected. But with a forecasted 21.5% year-on-year drop in 2026 shipments to about 215,000 tons, the effect on Europe's market will be limited.

Middle East Geopolitical Risk: Low Probability, but Potential Impact Can't Be Ignored

The Middle East situation provides a non-symmetrical upside risk for the aluminum market.

In data terms, the Middle East region accounts for about 9% of global aluminum production, with most exported. However, the region itself only produces about 3% of global alumina and 1.2% of bauxite, and relies heavily on imported raw materials to keep smelters running.

This means if shipping through the Strait of Hormuz is disrupted, whether affecting aluminum exports or raw material imports, there would be a two-way impact on global aluminum supply.

Moreover, energy prices driven up by Middle East tensions would also affect global smelter profitability via the cost curve.

Copper-Aluminum Ratio over 4x, Copper Substitution Still Underway

Morgan Stanley forecasts that in 2026, China’s aluminum demand will maintain 2% year-on-year growth to reach 46.1 million tons, already above the domestic production cap, with any shortfall needing to be covered by imports.

Demand factors include the new five-year plan (2026-2030), which intends to invest 4 trillion RMB in grid upgrades, a 40% surge over the previous plan. Although solar PV installation is expected to decline, aluminum consumption for Concentrated Solar Power (CSP) is more than twice that for PV, with an aggressive 2030 target of 15 GW (currently only 1.7 GW).

(Solar demand has reached previous peaks but continues to have room for growth)

Copper-aluminum price ratio remains over 4x, at the high end of historical range, and Morgan Stanley believes this ratio provides significant relative value support for aluminum price catch-up.

(LME copper-aluminum ratio)

Theoretically, when copper-aluminum price ratio exceeds a certain threshold, some industrial copper applications will shift to aluminum.

The most obvious substitution opportunity now is in HVAC. For the same current, aluminum wires require a cross-sectional area 1.6 times that of copper wires, which limits substitution in space-constrained scenarios, but in HVAC and other less space-sensitive areas, substitution is accelerating.

Meanwhile, in the aluminum can sector, aluminum’s market position remains stable and is even steadily overtaking materials like plastic, driven primarily by consumer preference for sustainable packaging.

Morgan Stanley Remains Bullish, Bull Target $3,700

In summary, Morgan Stanley maintains a bullish view on aluminum in its report, even as price already touches its Q2 benchmark forecast of $3,250/ton.

Morgan Stanley’s main points:

Supply: Chinese capacity capped, Indonesia growth slowing, Europe and U.S. smelter restarts face hard power constraints, global supply structurally pressured;Demand: U.S. destocking can’t continue indefinitely, buyers will eventually return to the primary aluminum market; European demand driven by auto industry, up 4% YoY in January; ongoing copper-aluminum substitution;Price catalysts: Aluminum has clear catch-up space versus copper; further Middle East tension could tighten supply more;Cost curve: As alumina prices fall and aluminum prices rise, smelter profit margins expand, but about 50% of global smelting capacity depends on third-party power contracts, and power cost increases remain the main headwind.

(Divergence of alumina and aluminum prices will lift smelter margins)

According to Morgan Stanley’s forecast:

2026 Benchmark Forecast: Aluminum price about $3,088/ton (annual average);

Q2 Benchmark Forecast: $3,250/ton;

2026 Bull Market Scenario: $3,700/ton;

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The above content is from Wind Trading Desk.

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