Power constraints combined with supply-demand imbalance, will aluminum be the next copper?

Aluminum, long overshadowed by the brilliance of industrial metals like copper, is stepping into the spotlight due to a potential structural shift in supply and demand.

According to Citigroup analysts, the global surplus of primary aluminum supply is expected to narrow rapidly by 2026, and from 2027, a supply gap of approximately 1.4 million tons will emerge, accounting for 2% of total primary aluminum consumption.

At the same time, rapidly growing industries such as electric vehicles, solar power generation, and data centers are driving a surge in aluminum demand. According to Wood Mackenzie data, electric vehicles are the largest source of aluminum demand in the energy transition, with each electric vehicle using about 150 pounds more aluminum than a gasoline vehicle. The high electricity consumption characteristics of aluminum smelting pose challenges for new capacity.

Market valuations indicate that aluminum is still undervalued. WisdomTree's aluminum ETF manages less than $40 million in assets, while its copper products manage over $1 billion. Companies like Alcoa have stock prices that are less than 13 times their expected earnings over the next 12 months, far below the nearly 30 times valuation level of copper companies like Glencore.

Supply and Demand Landscape Reaches Historic Turning Point

The aluminum market is undergoing a fundamental transformation. Over the past two decades, aluminum prices have risen by about 44%, significantly lagging behind copper's increase of over 160%.

However, this pattern is about to change. Citigroup analysts expect that the global surplus of primary aluminum supply will rapidly narrow by 2026, with a gap of approximately 1.4 million tons starting in 2027. Wood Mackenzie anticipates that the supply shortage will begin in 2028 and last for about five years. As the world's largest aluminum producer and consumer, China is approaching its annual production capacity limit of 45 million tons.

Power Constraints Become Supply Bottleneck

Tight electricity supply is becoming a key factor limiting the expansion of aluminum production capacity. The aluminum smelting process requires a significant amount of electricity to break the strong bonds of aluminum oxide through electrolysis. According to the Aluminum Association of America, the annual electricity consumption of a new aluminum smelter is equivalent to the total electricity consumption of Boston or Nashville, Tennessee.

In potential emerging producer countries like Indonesia, electricity is also a limiting factor. New smelters may require the construction of coal-fired power plants, but Western banks are not strongly inclined to finance such projects.

The ambition for artificial intelligence development in the United States also makes it difficult to revive the former glory of smelting. Alcoa operates two of the four smelters still running in the U.S., and the company stated at an industry conference in September that it must compete for electricity contracts with tech giants like Amazon and Microsoft. Tech companies are willing to pay over $100 per megawatt-hour for electricity, while Alcoa needs to keep electricity prices around $30 per megawatt-hour to maintain the economic operation of its smelters

Energy Transition Drives Structural Demand

Aluminum plays a key role in several rapidly growing industries. According to Bloomberg NEF research, aluminum is one of the four key metals required for energy transition, alongside copper, lithium, and steel.

Electric vehicles are the biggest driver of aluminum demand growth. According to a report by CRU Group, electric vehicles use about 150 pounds more aluminum on average than internal combustion engine vehicles, mainly due to aluminum's high strength-to-weight ratio, which helps reduce vehicle weight and extend range.

In the solar power generation sector, aluminum is the second-largest metal input after steel. In power transmission, aluminum is becoming a substitute for copper due to its lower price, lighter weight, and suitable conductivity. In data center construction, aluminum is widely used in heat sinks, cooling systems, and structural frameworks.

Copper prices have risen over 20% this year, further driving the demand for aluminum as a substitute. Mining giant BHP stated that when the copper-aluminum price ratio reaches 3.5-4 times, the market will increasingly use aluminum to replace copper. This ratio has averaged 3.5 times over the past decade, and the current copper price is about 3.9 times that of aluminum.

Although recycled aluminum can provide some supply, it cannot fundamentally resolve the supply-demand contradiction. In many applications, recycled aluminum must be mixed with primary aluminum to meet quality standards. Wood Mackenzie's Patel pointed out that impurities can affect power transmission efficiency.

This year, a fire occurred at an aluminum rolling mill in New York, which produces about 40% of the aluminum for the U.S. automotive industry, leading to a sharp drop in Ford's stock price. Wood Mackenzie analyst Shashank Sriram stated that this incident reflects a deeper structural vulnerability—the U.S. smelting industry is shrinking under high energy costs, and there has been long-term underinvestment in rolling, extrusion, and finishing sectors.

In the new commodity bull market cycle, a perfect storm is forming across various fields, from soda cans to aluminum foil, and aluminum is expected to become the next market hotspot.

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