One metal is facing one of the largest supply shocks in its modern history, and Citi analysts think prices could surge meaningfully from here.

The Middle East disruption has hit aluminum at a uniquely vulnerable moment. Spare capacity is near zero, inventories heading into the shock were already at 55-year lows, and the cost of substitutes such as copper and plastics remains extremely elevated by historical standards.

Citi, which has been bullish on aluminium since mid-2025 when prices were around $2,600 a tonne, now expects them to average $4,000 a tonne in the second half of 2026, and in a bull case to reach an average of $5,350 a tonne in 2027.

“We see aluminium inventories drawing to fresh all-time lows over the next 6-12 months, with the associated buying of physical inventory futures hedges driving up prices to average $4,000/t during 2H’26,” the bank’s analysts wrote.

Citi’s view rests on structural arguments. China’s output remains capped, ex-China supply growth is insufficient to close the gap, and the damage from the supply shock is, in “already done,” the analysts said.

The bank projects a deficit of roughly 2.7 million tonnes this year even under sluggish demand conditions. Importantly, it believes the market “no longer requires strong demand growth to remain structurally tight.”

What makes the setup particularly acute, the analysts argue, is that persistent deficits must ultimately be absorbed through inventory drawdowns.

This is now the core issue facing the market,” they stressed.

Initially, hidden, financing, merchant, and pipeline stocks can cushion the blow, which is why tightening cycles in commodities tend to be “volatile, frustrating, and macro-driven rather than immediately explosive,” explained the analysts.

But as those buffers shrink and embedded short hedges tied to financing and carry begin to unwind, the market becomes increasingly exposed. Under those conditions, “relatively small shortages can generate disproportionately nonlinear price responses,” the team warned.

That dynamic is what underpins Citi’s view that aluminium retains strong upside convexity even amid broader macro uncertainty. The bank sees downside as increasingly “self-limiting outside of a severe recession” — one comparable in scale to the Volcker-era downturn or the 2008-09 global financial crisis.

Citi currently holds two open trade recommendations: a long December 2026 futures position and a long 3,300/3,600 call spread, both opened in January. The main risks here are a major risk-off event or a deep global recession, it said.
Source: Investing.com