Aluminum has settled around $3,165/t on the LME after a volatile June that saw prices spike to $3,800 on Gulf war fears before retreating 16% as the Strait of Hormuz reopened. Still up 20% year-on-year, the market is pricing in genuine structural tightness.
The defining feature of the aluminum market is China's 45Mt/yr capacity cap. Chinese smelter output is approaching this ceiling, and with domestic energy policy constraining new capacity additions, the rest of the world cannot compensate. Indonesia is adding 705,000t of new capacity, but this is a drop in the ocean against a global deficit that ING puts at 600,000t for 2026 and Macquarie estimates at 930,000t.
Physical tightness is unambiguous. LME inventories fell below 300,000t in July, the lowest since 2022. SHFE stocks are declining. US LME warehouses effectively hold zero aluminum — the last 125 tonnes were withdrawn in October 2025. The market continues to trade in backwardation, signaling buyers willing to pay premiums for immediate delivery.
Supply disruptions compound the structural constraint. Century Aluminum's Nordural smelter in Iceland (320ktpa capacity) idled two-thirds of production after an October 2025 electrical failure, with restart expected to take 11-12 months. Mozambique's Mozal smelter moved to care and maintenance in March 2026 after failing to secure power agreements. European capacity — more than 1Mt/year idled during the 2022 energy crisis — remains offline as power costs make restarts uneconomic.
ING's outlook points to Q3 2026 at $3,500/t and Q4 at $3,400/t. Bull-case scenarios from FXStreet and Discovery point to $4,000/t under sustained supply disruption. December 2027 LME contracts trade near $3,043-3,048/t, indicating the forward market sees sustained tightness.
Demand drivers are genuinely structural. EVs use roughly double the aluminum of ICE vehicles. Grid investment, renewable energy infrastructure, and aerospace demand all support consumption growth. The Aluminum Association notes that AI data centers are competing directly with smelters for power — technology companies are committing upwards of $115/MWh, while smelters need ~$40/MWh to be competitive.
The bull case: China's cap is binding, smelter disruptions compound structural tightness, LME inventories at multi-year lows with backwardation signaling urgency, and demand from electrification and AI infrastructure accelerates. The bear case: Middle East smelter restarts could bring supply back faster than expected, Morgan Stanley sees the deficit narrowing in 2026 toward surplus in 2027, and high prices could incentivize substitution. The base case: deficits continue through 2026, with prices in the $3,200-$3,500 range as supply struggles to keep pace with demand.
Aluminum is structurally tight and likely to remain so. The China cap is not negotiable — it is energy policy, not market-driven. Lock in H2 volumes now rather than waiting for a correction back to $3,000. The risk is to the upside: any new smelter disruption, power crisis, or demand surprise could push prices toward $3,500-$4,000. Use floating LME formulas with price floors rather than fixed contracts — protect against the upside while leaving room if Morgan Stanley's surplus scenario materializes. Pay attention to the Japan Q3 premium settlement ($395/t, up from Q2) as a real-time indicator of physical market conditions in Asia. Separate the metal premium from conversion costs and negotiate terms that allow pass-through of energy surcharges.