Moving towards the most severe supply shortage in 20 years, Wall Street major banks: Aluminum prices have a long-term upside potential of 50-60%

The global aluminum market is heading towards its most severe supply shortage in over twenty years, and if prices remain at current levels, a crisis of depleted inventories may be unavoidable.

According to news from the Chase Trading Desk, Citigroup analysts Wenyu Yao, Maximilian Layton, and Shreyas Madabushi stated in a report on September 15 that they are structurally bullish on aluminum. The current aluminum price of $2,500 per ton could lead to an unsustainable massive deficit in the market over the next five years, and aluminum prices need to exceed $3,000 per ton to stimulate the necessary supply growth.

In the medium to long term, Citigroup expects aluminum prices could even hit the "demand destruction" level of $4,000 per ton, indicating a long-term upside potential of 50-60%.

In light of this, Citigroup strongly recommends aluminum-consuming companies to hedge for the next 1-5 years at current price levels, and anticipates that as macroeconomic sentiment improves in 2026-2027, asset allocators and various funds will significantly increase their holdings in aluminum assets.

Capacity Contraction, Explosive Demand, Huge Upside Potential for Aluminum Prices

The low prices and oversupply pattern in the aluminum market over the past two decades have been primarily driven by the rapid expansion of low-cost capacity in China.

The report points out that this era has now completely ended. China's idle capacity has been fully absorbed, and it has entered a phase of "no new primary aluminum production growth."

While supply is constrained, the demand outlook for aluminum appears exceptionally strong. In addition to the ongoing structural demand driven by energy transitions such as electric vehicles, photovoltaics, wind power, and grid upgrades, a series of "future industries" are becoming new significant growth engines.

The report particularly emphasizes the disruptive impact brought by robotics (humanoid robots, robotic dogs, drones, etc.) and artificial intelligence/data centers. The report estimates that each humanoid robot requires 20-25 kilograms of aluminum.

Data from the report also shows that in the first quarter of 2025, capital expenditures on data centers by Chinese listed companies increased by 100% year-on-year; in July of the same year, the annualized production of industrial robots grew by approximately 60% year-on-year to 900,000 units. These emerging fields not only directly consume a large amount of aluminum but, more importantly, their enormous demand for electricity competes directly with aluminum smelting.

The report believes that China's massive investments in robotics and AI may replicate its pattern of "capital influx—cost reduction—production explosion" seen in energy transitions and the U.S. shale oil revolution, which will provide long-term and strong demand support for upstream raw materials such as aluminum, copper, lithium, and electricity

Indonesia Struggles to Meet Expectations, Scrap Aluminum is a Drop in the Bucket

After China's production capacity peaks, the world is looking to Indonesia to fill the supply gap.

However, Citigroup believes that even if all planned projects in Indonesia are pushed forward at full speed, it can only partially alleviate the shortage and cannot fundamentally change the situation.

According to the report's baseline scenario, Indonesia's aluminum production capacity is expected to reach 2.3 million tons by 2029. However, this heavily relies on investments in supporting self-built coal-fired power plants, which not only face environmental, social, and governance (ESG) risks but also regulatory and financing obstacles.

The report estimates that the investment payback period for such integrated projects can be as long as 8-11 years, even under the optimistic assumption of aluminum prices reaching $2,800 per ton. To achieve more aggressive expansion targets (such as reaching 4.45 million tons of capacity), its electricity consumption would account for over 14% of Indonesia's total power generation, raising doubts about feasibility.

Meanwhile, scrap aluminum recycling also struggles to meet expectations. Historical data shows that the increase in scrap aluminum recycling rates is highly correlated with strong price increases. In the absence of sustained price incentives, Citigroup expects the recycling rate to only moderately increase from the current approximately 45% to 50% in the coming years, mainly due to efficiency improvements brought by technologies like AI sorting, but this is far from enough to balance the market.

The report emphasizes that aluminum scrap is technically more difficult to respond to price signals than copper scrap, meaning the market cannot expect scrap aluminum to quickly fill the gap when prices are high, as is hoped for copper scrap.

Aluminum Prices Need to Rise to Balance the Market

Considering the outlook on both supply and demand, Citigroup concludes that the current price level is unsustainable. To incentivize the more than 10 million tons of new supply needed by 2030, aluminum prices must operate at a level significantly higher than the current one for the long term.

The report clearly states that prices need to remain stable above $3,000 per ton to provide sufficient investment returns for projects in places like Indonesia, thereby initiating new capacity construction.

If this still fails to bridge the supply-demand gap, or if scrap aluminum supply does not exceed expectations, the market will have to suppress demand through higher prices. In this case, aluminum prices may need to operate around $4,000 per ton, similar to the price levels required to balance the market in the early 2000s.

For investors, this means that the aluminum market is facing a fundamental structural shift. Low inventory, lack of supply elasticity, and strong emerging demand together create a bullish long-term outlook. Citigroup believes that compared to copper, the risks of a real deficit, depleted inventory, and spot premiums in the aluminum market are much greater