The aluminum market faces a complex landscape in the fourth quarter, with the refined aluminum supply deficit narrowing yet persisting, while alumina prices are expected to be dictated by cost dynamics amid an oversupplied market.

For refined aluminum, the core logic centers on a reduced but still positive deficit, stronger-than-expected inventory drawdowns, and a valuation profile where high industry profit margins contrast with low relative valuations. The strategy suggests a trading range with a midpoint of 23,500 yuan per tonne, fluctuating by plus or minus 1,500 yuan. If prices rally to the higher end of this range, it could present an opportunity to hedge forward risk, whereas a slower-than-expected closure of the supply gap might warrant short-term long positions on dips.

For alumina, the persistent oversupply situation is unlikely to change, making cost-based pricing the dominant influence. With limited production cuts, prices may test cash costs. The strategy focuses on a range of 2,500 to 2,950 yuan per tonne, with support found at marginal cost levels and potential resistance near warrant registration opportunities. Key risks include unexpected policy shifts regarding Guinean bauxite exports.

Core Thesis

In the fourth quarter, under a benchmark scenario, bauxite supply is ample and major policy changes from Guinea are not expected. Alumina will see a wave of new capacity come online, maintaining a state of oversupply. For refined aluminum, domestic output is near its capacity ceiling, with growth coming from overseas. The supply gap remains but is shrinking, with a potential shift to surplus expected from 2027 onwards. Key factors to monitor for refined aluminum include shifts in the macro narrative, inventory levels, and the copper-aluminum price ratio.

Q3 2026 Market Review

During the third quarter, both refined aluminum and alumina continued their H1 range-bound patterns, but pricing power shifted. Refined aluminum moved away from macro and overseas supply concerns, becoming more focused on domestic seasonal demand shifts and inventory drawdowns. Alumina, meanwhile, remained a tug-of-war between capacity expansion and cost fluctuations from bauxite supplies.

For refined aluminum, June saw bearish sentiment dominate, driven by expectations of Middle East smelter restarts and tighter market liquidity. Prices hit a low around 22,000 yuan per tonne and $3,040 per tonne on the London Metal Exchange in early July. However, this bearish view was fully priced in, and a rebound occurred from July to August, supported by spot demand, improved inflation data, and continued inventory declines globally. The persistent supply gap and strong export growth contributed to the rally. Upside was capped by expectations of future capacity additions and rising US Treasury yields, leading to a pullback and a return to range-bound trading. During the quarter, the monthly supply gap was estimated at a deficit of around 100,000 tonnes, while LME inventory levels fell from approximately 700,000 tonnes to 240,000 tonnes, reflecting the tightness in the physical market.

For alumina, the underlying theme of oversupply remained unchanged. The market's focus shifted from policy concerns to the interplay between high costs and new capacity. Prices found support from elevated bauxite costs and rising freight rates, while sustained capacity additions capped any significant rallies. Social inventory levels stayed high, pressuring spot prices. A brief rally in September, spurred by rising coal prices, faded quickly. The market structure continues to show weakness in near-term contracts compared to deferred periods, reflecting the lack of a fundamental basis for a sustained uptrend.

Alumina Fundamentals: Bauxite Supply and Cost Dynamics

Bauxite supply is currently ample. Cumulative imports from January to July 2026 totalled 139.88 million tonnes, a 13.7% increase year-on-year. Port inventory stood at over 31 million tonnes by mid-September, with a further 61 million tonnes held at smelters, providing roughly four months of consumption. Expectations for a Guinean export restriction policy remain speculative, with no formal legislated cap yet implemented. The measures actually in place, such as export tariffs and mining permit reviews, have not significantly restricted shipment volumes, based on import data. The risk of a formal policy remains a tail risk for Q4. In a benchmark scenario, the bauxite market is in clear surplus. The policy is likely to be price-supportive rather than a price driver.

Supply and cost projections for alumina hinge on bauxite prices. With import ore prices estimated between 70 and 75 US dollars per dry metric tonne, the marginal cash cost is projected to fall in the 2,600-2,700 yuan per tonne range, with full costs at 2,750-2,850 yuan per tonne. Given the lack of significant production cuts expected in Q4, alumina prices are likely to gravitate towards this cash cost level for support. The domestic alumina supply and demand balance for 2026 has been revised to show a surplus of approximately 3.26 million tonnes. This is due to a combination of new capacity coming online and persistent high inventory levels.

Total alumina inventory has been accumulating since bottoming out in May 2025, reaching a substantial 6.78 million tonnes by mid-September. This high stock level is a significant barrier to price increases. While the market structure may present some opportunities, the sheer volume of inventory, much of it locked in warrants with expiry dates, could lead to volatile price spreads. The lack of attractive deliverable profits suggests a repeat of the mass warrant expirations seen last year is less likely.

Refined Aluminum Fundamentals: Supply and Demand

Domestic supply for refined aluminum is nearing its effective ceiling. Operating capacity reached 45.61 million tonnes in August, an 98.53% utilization rate, exceeding the official capacity cap of 45.43 million tonnes. While strict enforcement is emphasized, current production has surpassed this limit. New projects in 2026 are limited, with estimated new output of about 800,000 tonnes, bringing total production to 45.37 million tonnes, a growth rate of 1.8%. Future growth will need to come from overseas projects.

Outside of China, a new round of capacity is set to come online between 2026 and 2030, primarily in Indonesia and Angola. The 2026 projection has been revised down to 1.855 million tonnes of new capacity, with an expected output contribution of 1 million tonnes this year, due to challenges such as power supply stability. Restart activity is a key variable. The Middle East is restarting faster than expected, but the overall net effect for 2026 is an estimated production loss of about 700,000 tonnes globally, an improvement from previous forecasts.

Domestic demand presents a mixed picture. Traditional sectors remain under pressure. The real estate market continues to be a drag, with new construction starts down 24% year-on-year. While the government aims to stabilize the sector, a full recovery is not anticipated. Home appliance production is also facing headwinds from reduced subsidies and export challenges. New energy sectors, however, offer continued support. Although automobile and photovoltaic production forecasts have been trimmed, the shift towards aluminum-intensive EVs and grid infrastructure provides structural demand. Exports have been a significant bright spot, with aluminum product and finished goods exports growing by 12.8% and 20.5% year-on-year respectively from January to July, driven by strong overseas demand. The total domestic demand is expected to increase by about 500,000 tonnes, a modest growth rate of 1.08%.

On a global scale, the supply and demand balance for refined aluminum is expected to tighten in 2026 before turning to a surplus in 2027-2028. This is driven by Australian smelters reporting approximately 500,000 tonnes of production losses year-to-date due to operational issues, which is nearly double initial expectations, and a wave of new capacity projects in Southeast Asia and India maturing by 2027. The domestic Chinese market is projected to record a surplus of 590,000 tonnes for 2026, balancing domestic supply constraints with demand growth.

Macro Factors, Inventory, and Valuation

The macro environment is a significant headwind, but the impact may be limited in Q4. The narrative of a weaker dollar and loose liquidity has stalled. Geopolitical tensions have raised oil prices, and strong AI-related capital expenditure has contributed to higher inflation and interest rate expectations. This has pushed up the US dollar and Treasury yields, which act as a valuation benchmark for metals and suppress their financial appeal. However, as many of these factors are already priced in, the impact from a further "macro headwind" is seen as bounded, unless there is an uncontrolled spike in oil prices.

Inventory dynamics remain supportive for refined aluminum prices. Domestic social inventories (including billet) have drawn down consistently, falling to 930,000 tonnes by mid-September, beating expectations. LME inventories are critically low at 240,000 tonnes. While export profitability has diminished, it remains in place, helping to balance international supply and demand. The low global inventory levels provide a solid price floor. The persistence of low inventories, with global refined inventory levels at just 240,000 tonnes on the LME and 930,000 tonnes in China, has been a key surprise, leading to repeated upward revisions of the deficit estimate for the quarter.

Valuation metrics present a mixed signal. The industry profit for electrolytic aluminum producers is high, reaching as much as 9,000 yuan per tonne in Q3, because capacity is capped while demand is growing. This high-margin structure is expected to persist, but the scope for further gains is limited, with a projected Q4 profit range of 5,500 to 8,500 yuan per tonne. The weighted average full cost is estimated to be around 16,500 yuan per tonne. This suggests a core price support zone of 22,000-25,000 yuan per tonne, but the price could touch these levels depending on several factors. Relative valuations, however, are considered low. The copper-aluminum ratio has consistently stayed above 4.0 this year, a shift from its historical 3-4 range, reflecting copper's stronger fundamentals and suggesting potential for aluminum to catch up. The domestic-overseas price ratio has recovered from its Q2 lows but is expected to remain weak as domestic markets show a surplus while overseas markets are tighter.

Outlook and Strategy

For refined aluminum, the benchmark scenario sees prices remaining in a core range of 23,500 yuan per tonne plus or minus 1,500 yuan. This is based on persistent macro headwinds and a narrowing supply deficit. Given the long-term outlook of transitioning to an oversupply, rallies towards the upper end of this range could be used to hedge future price risk. Conversely, if the supply gap closes slower than expected, buying on dips could be a viable short-term strategy.

For alumina, the strategy is also range-bound, operating between 2,500 and 2,950 yuan per tonne. The reasoning is straightforward: oversupply will pressure prices from above, while the cost structure provides support from below. Prices are likely to be pulled towards the marginal cash cost level as production cuts remain insufficient. The primary risk to this view is an unexpected, aggressive policy from Guinea regarding bauxite exports, which could disrupt cost structures and supply expectations.