Aluminum market surplus may arrive earlier, with supply pressure becoming the core issue in 2027
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Aluminum market surplus may arrive earlier, with supply pressure becoming the core issue in 2027
Morgan Stanley believes that Middle East restarts and global new capacity will push the aluminum market into a surplus of about 800 kt in 2027, weakening the aluminum price outlook.
- Faster-than-expected restart progress at Middle East smelters narrows the estimated 2026 aluminum market deficit from 1.8 Mt to 1.1 Mt.
- Power in Indonesia is being reallocated from nickel projects to aluminum projects, while Angola, Kazakhstan, Saudi Arabia and Europe also restart capacity, driving supply growth in 2027.
- In the near term, 3Q2026 may still be tight due to some offline capacity, inventory restocking and a flatter forward curve, leaving room for a temporary rebound in aluminum prices.
- The report forecasts the aluminum market will shift to a surplus of about 800 kt in 2027, expanding to about 1.8 Mt in 2028.
- Morgan Stanley lowered its aluminum price forecast to an average of $3,150/t in 2H 2026 and an average of $2,850/t in 2027.
Report interpretation
Overview
This report focuses on the global aluminum market supply-demand inflection point. The core judgment is that the recovery of disrupted capacity in the Middle East is faster than previously expected, while new capacity in Indonesia and other regions is coming online more quickly, causing the aluminum market to move from shortage to surplus earlier. The report acknowledges that 3Q2026 and even 4Q2026 may still see short-term tightness, but believes fundamentals will weaken significantly after 2027.
Core views
First, Middle East capacity restarts are the key variable in supply recovery; the report models Middle East output as down 1.8 Mt YoY in 2026 and expects 1.6 Mt of recovery in 2027. Second, Indonesian aluminum capacity growth has been brought forward, with output expected to rise from 1.55 Mt in 2026 to 2.84 Mt in 2027 and 4.20 Mt in 2028. Third, the global aluminum market remains in deficit in 2026 but with a smaller gap, then shifts to an 800 kt surplus in 2027 and a 1.8 Mt surplus in 2028. Fourth, copper supply remains tight while aluminum supply is more responsive to high prices, so the copper-aluminum ratio may rise further in the short term. Fifth, aluminum price upside is limited, but higher power costs and aluminum's role as a substitute for copper will limit the downside.
Analysis framework
The report mainly uses supply-demand balance tables, regional capacity restart tracking, new project commissioning schedules, inventory and forward-curve observations, regional premium comparisons, the relative copper-aluminum price ratio, and cost-curve constraints to assess the path of aluminum prices.
Methodology notes
Annual deficits or surpluses are estimated through capacity restarts, new capacity additions, and changes in demand.
The report incorporates Middle East restarts, Indonesian output growth, and project ramp-ups in other regions into its model, leading to the conclusion of a narrower deficit in 2026 and a shift to surplus in 2027.
The ratio of copper price to aluminum price is used to measure the relative tightness and substitution pressure between the two base metals.
The report notes that the LME copper-aluminum ratio is near historical highs, and the divergence between tight copper supply and easing aluminum supply may push the ratio even higher.
Marginal cost, regional premiums, and tariff effects are used to judge downside price room and the true landed price.
The report believes that new supply carries relatively high power costs, while U.S. tariffs and regional premiums affect aluminum's all-in cost competitiveness.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- AluminumCore research target
- Strengths
- In the short term, it is still supported by some offline Middle East capacity, restocking demand, regional premiums, and its role as a copper substitute.
- Weaknesses
- Middle East restarts are faster than expected, while new supply in Indonesia and other regions is accelerating, so the market may become clearly oversupplied from 2027 onward.
- Comparison
- Compared with copper, aluminum supply is more responsive to high prices, so its fundamentals are weaker.
- Risks
- If Middle East tensions escalate again, restarts and inventory releases may be delayed, and short-term prices may be higher than forecast.
- CopperRelative value reference asset
- Strengths
- Mine supply and scrap copper supply are tight, demand from data centers and power infrastructure is resilient, and a U.S. copper tariff decision is a potential catalyst.
- Weaknesses
- A high copper-aluminum ratio may gradually trigger substitution, though the report sees substitution as more of a slow-moving variable.
- Comparison
- The report believes copper-specific bullish drivers are stronger than aluminum's, leaving room for further short-term expansion in the copper-aluminum ratio.
- Risks
- If copper demand weakens or tariff catalysts disappoint, further upside in the copper-aluminum ratio may be limited.
- Regional aluminum premiumsChannel for expressing aluminum prices
- Strengths
- U.S. tariffs and European supply disruptions may cause some tightness to be reflected in regional premiums rather than LME prices.
- Weaknesses
- Middle East inventory releases and logistics normalization may ease regional tightness.
- Comparison
- Looking only at the LME copper-aluminum ratio may overstate aluminum's relative competitiveness because it does not account for regional premiums and tariffs.
- Risks
- Changes in regional policy, tariffs, and logistics disruptions will alter all-in price comparisons.
Key data
- 2026 aluminum market deficit forecast1.1 MtPreviously forecast at 1.8 Mt, with the deficit reduced due to Middle East recovery and other supply growth.
- 2027 aluminum market balance800 kt surplusThe report believes Middle East restarts and new capacity will push the market into surplus.
- 2028 aluminum market balance1.8 Mt surplusFurther releases of new capacity will expand the surplus.
- Peak disrupted smelting capacity in the Middle Eastabout 3.5 Mt/yearThe report estimates that affected capacity at the peak of the conflict exceeded 4% of global supply.
- Middle East 2026 output changedown 1.8 Mt YoYThe report assumes Middle East shutdowns will still affect 2026.
- Middle East 2027 output recoveryup 1.6 MtFaster-than-expected restarts are an important reason for the market to loosen.
- Indonesia aluminum output forecast1.55 Mt in 2026; 2.84 Mt in 2027; 4.20 Mt in 2028Reallocation of power from nickel operations to aluminum operations is bringing project start-ups forward.
- 2027 supply growth model3.9 MtThe report chart shows the scale of supply growth in 2027.
- Potential release of backlog inventorymore likely 400-500 ktThe report estimates a theoretical maximum of about 870 kt, but after deducting volumes already rerouted during the conflict, the likely amount is lower.
- LME copper-aluminum ratioabout 4.3xNear historical highs and could rise further as copper stays tight while aluminum loosens.
- Aluminum price forecast$3,150/t in 2H 2026; $2,850/t in 2027Morgan Stanley lowered its aluminum price forecast in its recent price outlook.
- 3Q2026 aluminum price assumption$3,300/tThe report believes short-term tightness and restocking may provide temporary price support.
Impact & implications
For investors, the report signals an inflection point for aluminum from short-term event-driven tightness to medium-term supply surplus. Aluminum prices may still be supported in the short term by Middle East risks, inventory restocking and regional premiums, but medium-term supply recovery and new capacity additions will cap upside. In relative allocation terms, copper's tight supply and resilient demand make it better supported relative to aluminum, and the copper-aluminum ratio may continue to rise.
Risks
- A renewed escalation of geopolitical conflict in the Middle East, causing restart delays, logistics disruptions, or delayed inventory releases.
- Slower-than-expected progress in restart projects in Indonesia, Angola, Kazakhstan, Saudi Arabia, and Europe, delaying the arrival of surplus.
- Stronger-than-expected aluminum demand from China, autos, the power grid, real estate, or infrastructure.
- Persistently strong copper prices may provide additional support to aluminum prices through the substitution logic.
- Higher power costs for new capacity may limit aluminum's decline below the cost curve.
What to watch
- Restart progress at EGA Al Taweelah, Alba, Qatalum, and Iranian smelters.
- Recovery of shipping through the Strait of Hormuz and the scale of backlog metal releases in the Middle East.
- Power reallocation in Indonesia, Tsingshan-related aluminum projects, and ramp-up of new output.
- Commissioning schedules for projects in Angola, Kazakhstan, Saudi Arabia, Slovalco, and Magnitude7.
- The LME aluminum forward curve, inventory restocking behavior, and regional physical premiums.
- China's aluminum wire exports, the SHFE/LME price spread, and output performance near China's 45.4Mtpa capacity cap.
- The U.S. copper cathode tariff decision, the tightness of copper mine and scrap supply, and changes in the copper-aluminum ratio.