Wall Street is revising its expectations for the aluminum market. In its latest significant research report released on November 19, Morgan Stanley pointed out that the fundamentals of aluminum are undergoing a structural reversal.
According to reports from Fengchao Trading Desk, Morgan Stanley's latest forecast suggests that the global aluminum market will fall into a supply deficit by 2026, which is notably earlier than the previously widespread expectation in the market. The primary driving force behind this comes from the rapidly widening gap between demand and supply: on the demand side, the consumption of aluminum by energy storage systems (ESS) has shown a "surge" trend, completely offsetting weaknesses in other sectors; on the supply side, global power shortages are becoming a hard constraint, with AI computing power competing for electricity, squeezing the already vulnerable and energy-intensive aluminum smelting capacity.
Previously, mainstream views in the market were relatively conservative. Citibank analysts had predicted that the global primary aluminum supply shortfall would begin in 2027, while Wood Mackenzie believed the deficit would start in 2028. This time, Morgan Stanley's prediction advances the timeline for the deficit by at least one year. The bank has comprehensively revised upward its earnings forecasts and target prices for aluminum industry stocks, arguing that the market underestimates the speed at which energy transition consumes base metals and the severity of power bottlenecks.
Morgan Stanley's analysis indicates that besides the mismatch between supply and demand, inventory data also sends warning signals. With the proportion of direct utilization of molten aluminum increasing, the deliverable sources flowing into futures markets will become even tighter, providing extremely high safety margins for aluminum prices. The momentum for rising aluminum prices is shifting from mere macro expectations to solid fundamental support. By 2026, the global aluminum market will enter a supply shortage, leading Morgan Stanley to revise upwards its earnings forecasts and target prices for aluminum industry stocks.
On the Demand Side: Energy Storage Becomes a 'Hidden Giant'
The market has long underestimated the consumption of base metals due to energy transition, especially in the energy storage sector. Morgan Stanley's data not only surprises but also rings alarm bells:
Remarkable Unit Consumption: According to the latest channel research, every 100GWh of ESS (including batteries and components) requires 160kt of aluminum. This includes the use of castings, foils, and components.
Penetration Rate Soaring: The proportion of energy storage batteries in China's total battery production has rapidly risen from 25% in June to over 40% currently.
Due to the base effect, the absolute increase is huge:
Aluminum consumption is surging: It is estimated that ESS will consume approximately 960kt of aluminum in 2025 (a 71.4% YoY increase). By 2026, just ESS alone will bring an additional 1440kt of new aluminum demand.
Combining this with the demands from electric vehicles (production up 30% YTD), home appliances, and power cables, even considering a possible decline in photovoltaic installations in 2026 (from 280-290GW in 2025 to about 200GW), the increase from ESS alone is sufficient to support overall aluminum demand growth exceeding 2% in 2026.
On the Supply Side: The 'Power War' Between AI and Aluminum Smelting
The main argument for previous bearish views on aluminum prices was the release of Indonesian supplies, but Morgan Stanley points out that this expectation is overly optimistic, overlooking critical "power" constraints.
Indonesian capacity disappointments: Despite numerous plans for aluminum capacity in Indonesia, actual commissioning speeds are very slow. Although Indonesia has large-scale pipeline projects, Morgan Stanley expects only an additional 700kt of supply from Indonesia in 2026. For example, Xinfa Group's follow-up project in Morowali, requiring the construction of its own 2.5GW power plant, is expected to delay power supply until the end of 2027.
Global power competition: Power-intensive aluminum smelting faces growing competition from AI data centers' increasing power demands.
Data from the American Aluminum Association shows that smelters need electricity prices of $40/MWh, whereas tech companies are willing to pay over $100/MWh for AI computing power.
This price disadvantage makes it difficult to restart the 850kt of idle capacity in Europe and America, and even threatens existing capacities (such as South32's Mozal project facing risks in renewing power contracts).
Approximately 700kt of capacity worldwide has been disrupted this year due to power issues.
China's capacity ceiling: As the world's largest producer and consumer of aluminum, China is steadily approaching its annual production capacity limit of 45 million tons. By 2026, the incremental domestic supply in China is expected to be merely 600-700kt.
Overall, the global aluminum supply increment in 2026 is expected to be only 1300-1400kt (about a 1.9% YoY increase), failing to meet the demand growth exceeding 2%, resulting in a market deficit.
Inventory and Market Structure: Extremely Low Inventories Support Price Bottoms
Fundamental tightness has already reflected in inventory data, providing extremely high safety margins for aluminum prices.
Historically low inventories: Current aluminum inventories in China stand at merely 600kt, at historically low levels relative to the past five years.
Increasing proportion of molten aluminum: Encouraged by government policies to increase direct utilization of molten aluminum, aiming to raise it from the current 77% to 90% by 2027. This means fewer ingots will be cast for delivery into futures markets, further exacerbating the tension in deliverable sources and strongly supporting aluminum prices.
