Aluminum Industry Summary: Slight Increase in Chinese Production, Major Supply Disruptions in the Middle East

Overview

This report summarizes UBS’s recent expert meetings on the aluminum industry, focusing on the latest supply and demand dynamics in China, Indonesia, and the Middle East. Despite market concerns about overcapacity in China, production is still expected to grow moderately in 2026. Indonesia, as an emerging supply source, faces significant policy and infrastructure bottlenecks in expanding its capacity. Meanwhile, the Middle East suffers severe supply disruptions caused by geopolitical conflicts, significantly impacting global balance.

Core views

China: Experts project China's aluminum output to reach 45.5 million tons in 2026, a 2% increase from 2025's 44.5 million tons. Despite overcapacity worries, growth is primarily driven by: 1) legacy non-compliant capacity—around 600,000–700,000 tons per year—still operational after being initiated 3–5 years ago; 2) asynchronous capacity replacement, with new capacity coming online faster than old capacity is retired; 3) limited local adjustments to current intensity, which shorten cell life and increase pressure next year. Local governments lack incentives to reduce such capacity due to fiscal contributions, while central policies may shift toward legalizing legacy capacity through carbon compliance, potentially raising authorized capacity ceilings to around 46 million tons. Indonesia: It is expected to add 2.2 million tons of electrolytic aluminum capacity in 2026 and 2.0 million tons in 2027 (with actual output at 1.1 million and 1.8 million tons, respectively). Although high profits encourage early commissioning, implementation risks are very high: 1) tax incentives are critical constraints; many smelters have not received exemptions from import tariffs (13.5%), export taxes, or income taxes, leading to profit compression and even inventory buildup (e.g., Adaro may accumulate 300,000 tons of stock in 2026 if approvals remain pending); 2) power and equipment limitations—power plant construction takes over two years, Chinese generator deliveries require four years, and electrolyzer deliveries take six to twelve months. For alumina, planned capacity additions of 1.0 million tons in 2026 and 5.2 million tons in 2027 face delays due to the transition of bauxite mining permits (RKAB) to an annual system, along with tighter regulations driving FOB bauxite prices up to $42 per ton, pushing alumina production costs to 2,200–2,400 yuan per ton. Middle East: Aluminum production is expected to drop by roughly 2.2 million tons in 2026, affecting 3.5–3.8 million tons of capacity. Reasons for the disruption include raw material shortages (Alba, Jebel Ali, and parts of Iran facing constrained supplies, with recovery taking three to six months) and severe facility damage (Al Taweelah >1.6 million tons, Qatalum ~200,000 tons, requiring more than 12 months to restore). Logistical constraints limit alumina inflows through Red Sea and Gulf ports, resulting in regional inventories accumulating to 1.1–1.2 million tons.

Analysis framework

The report employs a typical 'regional supply-demand framework' for analysis. First, primary micro-level data is gathered through expert interviews, breaking down the global aluminum supply chain into three key segments: China (the largest producer), Indonesia (a major incremental source), and the Middle East (an important export hub). Second, within each segment, the report delves deeply into supply-side rigidities—such as China's policy compliance, Indonesia's tax and power bottlenecks, and the Middle East's geopolitical damage—rather than solely focusing on demand. Finally, by integrating specific capacity deployment schedules, inventory accumulation patterns, and recovery timelines, the report qualitatively assesses each region's marginal impact on the global aluminum balance sheet. This bottom-up approach, centered on supply constraints, helps investors identify short-term supply elasticity and long-term structural shifts.

Methodology notes

• Industry / sector analysisSupply-demand framework

  分区域供需平衡分析

  The report divides the global market into three independent units—China, Indonesia, and the Middle East—analyzing their respective supply constraints (e.g., policy, electricity, war) and output forecasts to infer changes in total global supply. This structured analytical method is commonly used in commodity research.

• Industry / sector analysisUpstream-downstream transmission

  上游资源限制向中游加工成本的传导

  When analyzing Indonesia, the report notes that tightening upstream bauxite approvals and rising prices—from $32 to $42 per ton—directly drive up midstream alumina production costs—from 2,000–2,200 yuan to 2,200–2,400 yuan. This illustrates how fluctuations at the raw materials end propagate downstream along the value chain, increasing cost pressures.

Key data

• China's 2026E aluminum production45.5 million tonsUp 2% year over year (from 44.5 million tons in 2025)
• Scale of China's legacy non-compliant capacity600,000–700,000 tons/yearPrimarily from projects initiated 3–5 years ago but never finalized
• Indonesia's 2026E additional electrolytic aluminum capacity2.2 million tonsActual output expected to be 1.1 million tons
• Indonesian bauxite FOB price~$42 per tonIncreased from $32 per ton in January, driving up alumina costs
• Indonesian alumina production cost2,200–2,400 yuan per tonHigher than the previous range of 2,000–2,200 yuan per ton
• Middle East's 2026E production loss~2.2 million tonsAffected capacity totals 3.5–3.8 million tons
• Middle East's accumulated regional inventory1.1–1.2 million tonsAccumulated since supply disruptions began

Impact & implications

The report concludes that the global aluminum supply landscape is becoming increasingly fragmented. While China's production is growing, it faces policy ceilings and lingering issues, limiting its growth rate. Indonesia, as a future major incremental source, struggles to fully realize its planned capacity due to tax and infrastructure constraints, potentially delaying the onset of global oversupply. Meanwhile, prolonged supply disruptions in the Middle East—especially extended shutdowns at major facilities like Al Taweelah—will remove significant volumes from the global market and continue disrupting logistics chains. Taken together, these factors may provide some short-term supply-side support for aluminum prices, but close attention should be paid to how China ultimately handles legacy non-compliant capacity and how Indonesia implements its tax policies.

Risks

• 房地产施工恶化
• 太阳能/风能装机量不及预期
• 家电出口订单下降
• 国家电网和南方电网资本开支不及预期

What to watch

• China's central government policies regarding carbon compliance for legacy non-compliant capacity
• Progress on tax exemption approvals for Indonesian smelters and inventory changes at companies like Adaro
• Recovery progress and restart timelines for damaged facilities in the Middle East, such as Al Taweelah
• Speed of issuing annual RKAB quotas for Indonesian bauxite mining