Middle Eastern restarts and new capacity bring the aluminium surplus forward
AI summary card
Middle Eastern restarts and new capacity bring the aluminium surplus forward
Morgan Stanley expects the aluminium market may remain tight in the near term, but Middle Eastern restarts and global capacity additions will turn the market into an 800 kt surplus in 2027, prompting downward revisions to its aluminium price forecasts for 2H2026 and 2027.
- The impact of Middle Eastern aluminium smelter outages is lower than previously expected, with EGA, Alba, Qatalum and others restarting faster. Morgan Stanley has revised its forecast for the year-on-year decline in Middle Eastern production in 2026 to 1.8 Mt and expects 1.6 Mt to recover in 2027.
- Supply outside the Middle East is also accelerating. Indonesia is expected to add approximately 870 kt of domestic production in 2026, driven by power reallocation and new capacity. Additional supply will also come from Angola, Kazakhstan, Saudi Arabia and restarts in Europe.
- The aluminium market may remain tight in 3Q2026, with restocking, a flattening forward curve and geopolitical risks potentially supporting prices. However, the market is expected to shift to an 800 kt surplus in 2027, expanding to 1.8 Mt in 2028.
- The LME copper-aluminium ratio is near historical highs. Tight copper supply and a faster aluminium supply response could push the ratio higher, although regional premiums and substitution demand will limit aluminium's downside.
Report interpretation
Overview
This report focuses on the turning point in global aluminium supply and demand. Morgan Stanley believes that Middle Eastern smelting capacity will restart faster than expected, while earlier-than-expected capacity additions in Indonesia and elsewhere will shift the aluminium market from a deficit in 2026 to a surplus in 2027. In the near term, aluminium prices may remain supported in 3Q2026 by incomplete restoration of some Middle Eastern capacity, inventory replenishment and geopolitical risks; however, upside will be limited as supply recovers and new capacity comes onstream.
Core views
The core views are: first, peak Middle Eastern outages reached approximately 3.5 Mtpa, but actual monthly production losses were smaller than initially feared and restarts have proceeded faster; second, the aluminium market will remain in deficit in 2026, but the shortfall has narrowed from the previous forecast of 1.8 Mt to 1.1 Mt; third, supply growth of approximately 3.9 Mt in 2027 will push the market into an 800 kt surplus, which could expand to 1.8 Mt in 2028; fourth, copper supply is tight while aluminium supply is more elastic, so the copper-aluminium ratio may continue rising.
Analysis framework
The report uses supply-demand balances, regional capacity tracking, smelter restart progress, inventory and logistics observations, forward curves and regional premium analysis. It also combines the relative fundamentals and substitution relationship between aluminium and copper to assess the price path.
Methodology notes
Assess annual deficits or surpluses based on production losses, restarts, new capacity and demand buffers.
The report incorporates Middle Eastern outages, new Indonesian production, projects in Angola and Kazakhstan, and Western restarts into its supply forecasts, concluding that the 2026 deficit will narrow and the market will shift into surplus in 2027.
Compare the relative strength of copper and aluminium prices, incorporating substitution demand and regional premiums to assess price support.
The LME copper-aluminium ratio is near historical highs. Tight copper supply may continue to support copper relative to aluminium, while aluminium's role as a key substitute for copper and regional premiums in the United States and Europe will influence relative price signals.
Use smelting costs, forward curves, inventory releases and restocking behaviour to assess downside and near-term volatility.
The power costs of new supply are higher than those of existing smelting capacity, suggesting that aluminium prices are unlikely to fall rapidly back to the cost curve. Meanwhile, a flattening forward curve and inventory replenishment may support prices in 2H2026.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Aluminium (LME Aluminium)The report's core asset; fundamentals are expected to shift from near-term tightness to a surplus in 2027.
- Strengths
- Near-term support from some Middle Eastern capacity remaining offline, restocking demand, regional premiums and its role as a substitute for copper.
- Weaknesses
- Faster-than-expected Middle Eastern restarts and new capacity in Indonesia and elsewhere will shift supply and demand into surplus from 2027.
- Comparison
- Weaker than copper because aluminium supply responds more quickly to high prices, while copper faces tighter constraints from mines, scrap and demand drivers.
- Risks
- A renewed escalation in Middle Eastern tensions could delay restarts and logistics recovery; new high-cost capacity could also limit the downside.
- Copper (LME/COMEX Copper)A relative-value comparison asset; the copper-aluminium ratio is a key analytical framework in the report.
- Strengths
- Tight mine and scrap supply, resilient demand from data centres and power infrastructure, and a potential US copper tariff decision as a catalyst.
- Weaknesses
- High copper prices will continue to encourage substitution demand, but the process is slow and many low-barrier applications have already substituted.
- Comparison
- The report believes copper may remain strong relative to aluminium, with further upside potential for the copper-aluminium ratio.
- Risks
- If copper supply pressures ease or demand disappoints, the copper-aluminium ratio could retreat toward a more normal range.
- Aluminium Regional PremiumsAffects aluminium's all-in price and its relative competitiveness versus copper.
- Strengths
- The 50% US aluminium tariff has lifted the Midwest premium, while Middle Eastern supply disruptions also previously pushed up all-in aluminium prices in Europe.
- Weaknesses
- As Middle Eastern logistics recover and inventories are released, supply tightness and regional premiums in Europe may begin to decline.
- Comparison
- Looking only at the LME copper-aluminium ratio may overstate aluminium's relative cheapness; incorporating regional premiums narrows the gap.
- Risks
- Policy, tariffs and logistics disruptions can cause regional prices to diverge from the LME benchmark.
Key data
- 2026 Aluminium Market Deficit Forecast1.1 MtNarrowed from the previous 1.8 Mt deficit, mainly due to faster-than-expected Middle Eastern restarts and supply growth elsewhere.
- 2027 Aluminium Market Balance Forecast800 kt surplusMorgan Stanley expects supply recoveries and new capacity to turn the market into surplus.
- 2028 Aluminium Market Balance Forecast1.8 Mt surplusThe surplus will expand further as new projects continue to ramp up.
- 2027 Supply Growth Forecast3.9 MtIncludes Middle Eastern restarts, Indonesian expansion, projects in Saudi Arabia and Kazakhstan, and Western restarts.
- Estimated Peak Middle Eastern Outages~3.5 MtpaEquivalent to more than 4% of global supply, although the monthly production impact is smaller than the peak outage figure implies.
- Forecast Change in Middle Eastern Production in 2026-1.8 Mt YoYThe report expects 1.6 Mt to recover in 2027.
- Potential Middle Eastern Inventory AccumulationMore likely 400-500 kt, with a theoretical upper limit of approximately 870 ktAs logistics through the Strait of Hormuz recover, the release of inventories could ease nearby tightness.
- Indonesian Aluminium Production Forecast1.55 Mt in 2026; 2.84 Mt in 2027; 4.2 Mt in 2028Driven by the reallocation of power from nickel to aluminium and new capacity construction.
- LME Copper-Aluminium RatioApproximately 4.3xNear historical highs; the ratio could expand further if copper remains tight.
- Aluminium Price Forecast2H2026 $3,150/t; 2027 $2,850/tThe price forecasts have been lowered in the latest price table.
Impact & implications
For investment and trading, the report indicates that aluminium's medium-term fundamentals are weakening, increasing the risk of simply chasing higher aluminium prices. However, in 3Q2026 investors should still watch for short-term price elasticity driven by inventory replenishment, regional premiums and renewed volatility in the Middle East. In relative-value terms, tighter copper supply and stronger copper-specific drivers may continue to support copper's outperformance relative to aluminium, leaving further upside for the copper-aluminium ratio.
Risks
- A renewed escalation in Middle Eastern geopolitical tensions could delay inventory releases and smelter restarts, thereby supporting aluminium prices.
- If new capacity in Indonesia, Angola, Kazakhstan and Saudi Arabia comes onstream more slowly than expected, the 2027 surplus could be below forecast.
- If copper prices continue rising, aluminium's substitution appeal could strengthen, providing additional support to aluminium prices.
- High power and production costs for new supply could limit aluminium's decline toward the cost curve.
- Regional premiums, tariffs and logistics constraints could cause LME price signals to diverge from end-user all-in costs.
What to watch
- Restart progress at Middle Eastern smelters including EGA Al Taweelah, Alba and Qatalum.
- Recovery of logistics through the Strait of Hormuz and the scale of Middle Eastern inventory releases, particularly whether the potential 400-500 kt release materializes.
- Power reallocation in Indonesia, the aluminium production ramp-up and delivery against the 2027 production forecast of 2.84 Mt.
- The aluminium forward curve, restocking behaviour, physical premiums and inventory changes from 3Q2026 through 4Q2026.
- The US copper tariff decision, copper mine and scrap supply, and support for copper prices from data centre and grid demand.
- Whether the copper-aluminium ratio continues to break above approximately 4.3x, and whether relative prices still support substitution after incorporating regional premiums.