Hidden Inventories Depleting; Aluminum Prices Bullish to $4,000

Overview

J.P. Morgan released an aluminum industry outlook report, stating that the market is currently in the middle of a large-scale supply shortage. Despite raising supply forecasts for China and assuming idle capacity in the Middle East is set to restart soon, the global primary aluminum market still faces a deficit of approximately 1.7 million tons in 2026. Currently, this gap is filled by 'hidden inventories' (unaccounted inventory held by producers, traders, and consumers), but industry feedback indicates these inventories can only support consumption for about another 2 months. As hidden inventories deplete, the supply shortage will begin to manifest in 'visible inventories' (exchange and warehouse accounted inventory), with approximately 75% of global visible inventories concentrated in China. The continued decline in Chinese inventories will push up Shanghai Futures Exchange (SHFE) aluminum prices. To maintain the export arbitrage window to ensure Chinese aluminum products flow overseas, London Metal Exchange (LME) aluminum prices must also rise synchronously. J.P. Morgan maintains its bullish view on aluminum prices, believing LME aluminum prices will move towards $4,000/ton, and has raised the average price forecast for H2 2026 to $3,750/ton. Meanwhile, the report highlights a major shift in the long-term perspective—new capacity outside China is accelerating, which could lead to significant market surplus by 2028, ending this round of price strength.

Core views

Supply Side: Huge Deficit and Slow Restart. The report predicts a global primary aluminum deficit of 1.7 million tons in 2026, with implied destocking alone reaching 2.3 million tons between 2Q26 and 4Q26, peaking in 2Q26 with implied destocking of 1.3 million tons. Although idle capacity at Middle Eastern smelters (due to Strait of Hormuz tensions) is expected to gradually restart from 3Q26, accelerating in 4Q26 and 1Q27, supply chain recovery takes time. Even if the strait fully reopens, full normalization of capacity will take several quarters. Therefore, the supply gap is difficult to bridge in the short term. Demand Side: No Signs of Demand Destruction. The report argues that despite high aluminum prices, no obvious signs of demand destruction have been observed. At recent industry conferences, consumers generally expressed optimism about demand and did not voice serious concerns about high prices leading to demand declines. Although the U.S. market paid higher aluminum prices due to tariffs, demand remains robust. J.P. Morgan expects non-China demand growth of about 0.4% in 2026, with weak European demand, and total global demand (including growth driven by Chinese exports) increasing year-on-year by approximately 1.7%. Inventory and Price Transmission: The Tipping Point from 'Hidden' to 'Visible'. This is the core analytical logic of the report. Current high aluminum prices and rising global premiums reflect market tightness, but global visible inventory levels remain roughly flat compared to late February, indicating that the deficit is primarily being absorbed by 'hidden inventories.' These include metal stocks held by Middle Eastern producers in consumption regions and trader inventories not registered with exchanges, whose depletion is also incentivized by backwardation structures. However, industry feedback shows that hidden inventories can only last for about another 2 months. With nearly 1 million tons of deficit remaining in the second half of the year, the market will inevitably be forced to consume visible inventories. Given that China holds about 75% of global visible inventories, the decline in Chinese inventories will become the core driver pushing up SHFE prices. Since markets outside China heavily rely on Chinese aluminum exports to make up for lost Middle Eastern supply, LME prices must remain sufficiently high to keep the export arbitrage window open. This 'arbitrage chase' will serve as the fundamental driver for further increases in LME prices. China Factor: Capacity Caps and Export Control Risks. Although domestic aluminum production in China has increased amid expanding profits and softer demand, and may briefly exceed the 45 million ton capacity cap due to efficiency gains, ongoing energy consumption and emission inspections will limit significant overproduction. Meanwhile, the report highlights an important upside risk: if China implements aluminum export controls (such as imposing export tariffs or directly restricting exports) to secure domestic supply safety, LME aluminum prices will face massive upside potential far exceeding current bullish forecasts. This is especially considering that Guinea (accounting for about three-quarters of China's bauxite imports) may further restrict bauxite exports, exacerbating China's concerns over supply security. Long-Cycle Perspective: The Shadow of 2028 Surplus. Despite the short-term bullish outlook, the report also depicts a shift in the medium-to-long-term landscape. Outside China, capacity driven by Chinese capital is accelerating construction in Indonesia, Angola, Saudi Arabia, and elsewhere. Indonesian capacity is expected to increase by approximately 2.5 million tons/year by 4Q27 compared to 1Q26. This marks the end of the era of global aluminum supply discipline maintained by China's 45 million ton capacity ceiling. J.P. Morgan predicts that even with quite aggressive demand assumptions, the market will see a surplus close to 1 million tons in 2028. This will cause prices to fall back starting from H2 2027, dropping below $3,000/ton to force out high-cost capacity and compress currently generous production margins.

Analysis framework

J.P. Morgan's analysis progresses layer by layer along the main thread of 'Supply-Demand Balance Sheet → Inventory Structure → Cross-Market Arbitrage → Policy Game → Long-Cycle Capacity Cycle'. First, the report constructs a detailed global primary aluminum supply-demand balance sheet, quantifying the scale of the 2026 supply deficit (1.7 million tons) and breaking it down by quarter, identifying the peak deficit in 2Q26. This foundational work provides a quantitative premise for all subsequent judgments. Second, the report introduces a key observational dimension—'inventory structure.' Analysts observed that changes in visible inventories were far smaller than the implied deficits in the balance sheet, leading them to infer that 'hidden inventories' are being consumed in large quantities. Through industry research (feedback from the Harbor Aluminum Summit), they further quantified the remaining consumable time for hidden inventories (about 2 months), thereby inferring that the market is approaching a critical point where the 'deficit becomes visible.' This distinction and tracking of 'hidden' versus 'visible' inventories is a classic method for understanding the micro-transmission mechanisms in commodity markets—true supply tightness must ultimately be reflected in declining inventories at exchanges or statistical warehouses. Next, the report focuses the global perspective on China. Since China possesses 75% of global visible inventories and markets outside China rely on Chinese exports, analysts established a clear 'dual-market arbitrage transmission' logic: Decline in Chinese inventories → Rise in SHFE prices → To maintain aluminum product exports overseas, LME prices must rise synchronously to keep the export arbitrage window open. At the policy level, the report employs scenario analysis to explore the extreme impact of potential events like Chinese aluminum export controls on global aluminum prices, analyzing the triggering conditions behind them (declining domestic inventories, restrictions on Guinean bauxite exports). Finally, the report extends its horizon, using the 'capacity cycle' framework to analyze the commissioning pace of new capacity outside China (especially in Indonesia), judging that current supply discipline is loosening, laying the groundwork for the surplus格局 in 2028, and predicting the time window for prices to fall back from highs based on this.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Balance Sheet Analysis

  By constructing balance sheets for aluminum production and consumption globally and by region, calculating supply-demand gaps (surplus/shortage). This is a core tool for fundamental commodity analysis. This report derives a deficit of approximately 1.7 million tons for 2026 based on this method, broken down by quarter, providing a quantitative basis for the bullish aluminum price view.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Distinction and Transmission of Hidden vs. Visible Inventories

  Dividing aluminum inventories into 'hidden inventories' (unaccounted stock held by producers, traders, and consumers) and 'visible inventories' (stock accounted for by exchanges and social warehouses). Supply deficits first consume hidden inventories; only when hidden inventories are depleted does the deficit manifest as a decline in visible inventories, ultimately exerting strong influence on prices. The report judges that current price pressures have not yet been fully released by tracking this transmission process.

• Event Gaming and Behavioral FinanceEvent-driven analysis

  Impact of Strait of Hormuz Geopolitical Events on Supply

  Analyzing the shock path of major geopolitical events (such as strait blockades and reopenings) on commodity supply. The report argues that even if the strait reopens, due to lags in capacity recovery, the resulting supply losses will remain固化 for months, which is an important premise for maintaining the bullish view.

• Industry/Industrial Analysis FrameworkCost curve analysis

  Cyclical Relationship Between Price, Cost, and Profit

  When predicting the 2028 surplus, the report points out that prices will fall back near the cost line to compress currently high production margins, thereby curbing the influx of new capacity. This is typical 'price-cost-profit-supply' cyclical adjustment logic, where high profits stimulate new supply, eventually leading to surplus and suppressing prices to cost levels.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Export Arbitrage Window Analysis

  Judging the motivation for Chinese aluminum product exports by comparing the spread between domestic Chinese aluminum prices and LME prices plus overseas premiums (i.e., the export arbitrage window). The report argues that LME prices must remain sufficiently high to keep this window open, thereby attracting Chinese aluminum products to overseas markets, constituting the 'arbitrage chase' catalyst for LME price increases.

• Cycle and Prosperity FrameworkCapacity/Equipment Cycle (Juglar)

  Capacity Cycle and Supply Discipline

  The report points out that global supply discipline, represented by China's 45 million ton capacity cap, is ending, replaced by massive capacity expansion outside China (Indonesia, Africa, etc.). This marks the entry of the global aluminum industry into a new capacity release cycle, ultimately leading to severe surplus and price drops in 2028.

Key data

• 2026 Global Primary Aluminum Deficit Forecast1.7 million tonsThis is the annual deficit scale predicted by J.P. Morgan's latest balance sheet.
• Implied Destocking 2Q26-4Q262.3 million tonsInventory consumption required over three quarters, with 2Q26 being the peak, implying destocking of 1.3 million tons.
• Consumable Time for Hidden InventoriesApprox. 2 monthsBased on industry conference feedback, unaccounted industry inventories are expected to support only about another 2 months of deficit filling.
• Proportion of Chinese Visible Inventories to GlobalApprox. 75%China accounts for the vast majority of the global approx. 1.7 million tons of visible inventories.
• H2 2026 LME Aluminum Average Price Forecast (New)$3,750/tonRaised compared to the April report, reflecting stronger confidence in prices.
• LME Aluminum Price TargetMoving towards $4,000/tonThe short-term bullish target price maintained in the report.
• Indonesian Capacity Increase (4Q27 vs 1Q26)Approx. 2.5 million tons/yearA typical representative of new capacity outside China, showing long-term supply pressure.
• 2028 Global Aluminum Surplus ForecastClose to 1 million tonsEven with relatively optimistic demand forecasts, the surplus scale remains huge, serving as the core basis for bearish medium-to-long-term prices.

Impact & implications

This report has several important implications for the aluminum industry and related markets: First, regarding aluminum prices, the report believes the upward trend over the next few quarters is clear, with momentum switching from 'consumption of hidden inventories' to the more powerful phase of 'decline in visible inventories.' Although the reopening of the Strait of Hormuz may bring a brief knee-jerk drop, it will not be enough to change the tight supply-demand fundamentals. Second, the report reveals subtle shifts in global aluminum market pricing power. As the world's largest producer and consumer, China's inventory dynamics and export policies have unprecedented influence on global prices. SHFE prices in China will first reflect domestic tightness, then transmit to LME through the export arbitrage mechanism. Global aluminum prices will increasingly closely follow the rhythm of the Chinese market. Third, for industry participants, the current high-profit environment is attracting significant new capacity, especially projects driven by Chinese capital outside China. This foreshadows the industry transitioning from a 'supply discipline' to a 'capacity expansion' cycle. The severe surplus possibly emerging in 2028 will pose major challenges to high-cost producers, intensifying industry consolidation and cost competition. Finally, the report highlights a tail risk: export controls implemented by China to secure domestic supply could become a 'black swan' event triggering aluminum prices to rise beyond expectations, with impacts far exceeding current fundamental forecasts.

Risks

• Stronger-than-expected supply growth in China, or faster-than-expected restart of idle capacity in the Middle East, represents fundamental risks that could weaken the bullish thesis.
• High aluminum prices and the overall inflationary environment could lead to demand destruction, although no obvious signs have appeared yet.
• To secure domestic supply safety, China may implement aluminum export controls (imposing tariffs or restricting exports), which would cause LME aluminum prices to rise significantly, far exceeding current forecasts.
• Long-term risk: The global aluminum market will see a surplus close to 1 million tons in 2028, at which time prices will face significant downward pressure, potentially dropping below $3,000/ton.

What to watch

• Weekly changes in Chinese social aluminum inventories (SHFE + regional warehouses) to confirm whether the inventory decline trend is accelerating and sustaining.
• Changes in Chinese aluminum product export volumes and the export arbitrage window, which is the core catalyst for LME aluminum price increases.
• Strait of Hormuz situation and actual restart progress of Middle Eastern smelters; any delays will exacerbate short-term shortages.
• Movements in Chinese industrial policy, particularly policy signals related to aluminum export controls and Guinean bauxite exports.
• Construction and commissioning progress of new capacity projects outside China in Indonesia, Angola, Saudi Arabia, etc.