Last week’s critical minerals deals between the US and Australia, as well as four Southeast Asian nations, have highlighted the West's push to strengthen supply chain resilience by increasing domestic production and reducing reliance on China for elements essential to defence, economic development, and the energy transition.

In addition to US$8.5bn of financing support for mining and processing projects announced in the US–Australia deal (including US$2bn over the next six months), the partnership will include coordinated infrastructure development, accelerated regulatory approvals, pricing mechanisms (e.g. price floors) and guaranteed purchase agreements.

Early funding targets include Arafura Rare Earths’ (ARU) Nolans Rare Earths Project in the NT and an Alcoa-led (AAI) gallium plant in WA, to be co-located with the company’s Wagerup Alumina Refinery. Gallium is closely related to aluminium and is often produced as a by-product of alumina refining, directly linking the project to Australia’s aluminium sector and existing infrastructure.

While support for rare earths has been the focal point of the deal, recent policy efforts have encompassed a much broader suite of critical metals with China-dominated supply chains – including aluminium. Like rare earths, aluminium is strategically important for both defence and the energy transition. Both alumina and aluminium production are dominated by China, which underscores the desire of the West to ‘reshore’ the aluminium value chain.

Both the US and Australian governments have provided material financing to the aluminium value chain over the past year, with a focus on 'green aluminium'. This includes a US$500m grant from the US Department of Energy for the construction of the first new US primary aluminium smelter in ~45 years, and the Australian Government’s A$2bn Green Aluminium Production Credit, which will support domestic smelters transitioning to reliable, renewable electricity before 2036.

Moreover, despite speculation that US President Trump could ‘water down’ some aspects of the Inflation Reduction Act, he remains committed to strengthening domestic aluminium production given its strategic importance – a goal that is at the forefront of ongoing trade negotiations, with the US currently imposing 50% tariffs on aluminium imports.

Collectively, growing recognition of aluminium as a strategically important critical metal – alongside expanding policy support – comes at a time when the commodity’s fundamentals are becoming increasingly attractive. Robust demand and constrained supply are expected to drive widening deficits and higher aluminium prices over the medium and long-term.

In the remainder of this report, we explore our constructive outlook for aluminium and provide the rationale for switching our preferred sector exposure within the Focus Portfolio from South32 (S32) to Alcoa (AAI).

The fundamental outlook of the global aluminium market, from a supply/demand perspective, is as healthy as it has been in years. While aluminium has been in a structural oversupply for much of the last two decades – driven by China’s massive capacity expansion – we are approaching an inflexion point where new supply is unlikely to keep pace with steadily growing demand. 

Demand underpinned by the energy transition and rising defence spend

A healthy medium- to long-term demand outlook for aluminium is supported by several key drivers:

• Traditional industrial uses – steady demand from traditional applications in construction, packaging, machinery, electronics, automotive, etc. 
• The energy transition – decarbonisation will be a key source of incremental demand over the coming years and decades, driven by structural growth in the global electric vehicle fleet (and vehicle lightweighting), rapid renewables deployment, and electricity grid modernisation.
• Rearmament and defence spending – increased NATO defence budgets should provide a tailwind to demand given aluminium’s widespread use in weapons systems, military vehicles, and aircraft.
• Generative AI – the AI-driven surge in data centre capacity will require aluminium for cooling systems, server racks & structures, cabling, and energy-efficient building construction.
• Material replacement – continued substitution of plastics in packaging and copper with aluminium in automotives and other industrial uses will further support demand growth.
• Green premium – growing demand for low-carbon ‘green aluminium’, driven by ESG initiatives, regulatory requirements, and investor expectations, is supporting a price premium for sustainably produced metal. 

New supply growth will be constrained by China’s capacity cap and high energy costs

On the supply side of the equation, over the coming years capacity expansion will be constrained by two key factors:

• China’s smelting capacity cap – Having supplied nearly all of the world’s new aluminium capacity over the past two decades, China is now nearing its self-imposed 45 Mt capacity limit, introduced in 2017 to curb overcapacity and emissions. There is no indication that Beijing intends to relax this limit, and in our view, the broader policy agenda of ‘anti-involution’ further reduces the likelihood. Future supply growth will therefore need to come from ex-China markets (e.g. Indonesia), which appear ill-equipped to meet rising demand. Moreover, given Chinese smelters sit at the very low end of the global cost curve – driven by China's cheap, abundant hydropower – new ex-China capacity is expected to push the global cost curve, and ultimately aluminium prices, higher over time. 
• Energy costs and availability – High energy prices and limited access to affordable power are emerging as major constraints on both existing and new supply. Smelting is extremely energy-intensive, with electricity accounting for roughly 40% of total production costs, and new projects typically requiring long-term (10+ year) power contracts at ~US$40/MWh to be economical. However, smelters are increasingly competing for power with other energy-hungry sectors – most notably Big Tech – which is willing to pay over US$100/MWh to secure capacity to power AI data centres. This pressure is already evident: Norsk Hydro recently wrote down Australia’s largest aluminium smelter, Tomago, to zero due to difficulties securing affordable renewable power. Tomago is also part owned by Rio Tinto and CSR. Meanwhile, South32 has heavily impaired its Mozal smelter in Mozambique, amidst uncertainty over power supply beyond mid-2026. Tightening power availability therefore looks set to constrain supply and further elevate the global cost curve over time.

Healthy demand + constrained supply = looming deficits

The combination of robust demand growth and structurally constrained supply supports expectations of widening aluminium deficits over the medium to long-term. Together with a rising global cost curve, this underpins our constructive view towards the commodity and its price outlook.

Given our constructive view towards aluminium, the commodity remains one of the Focus Portfolio’s key overweight exposures. However, we are taking this opportunity to adjust our sector positioning by removing South32 (S32) (-3%) and adding Alcoa (AAI) at a portfolio weight of 3%. 

Alcoa is a leading, vertically integrated aluminium producer with upstream exposure, operating from bauxite mining to alumina refining and finally primary aluminium production. The company is a relatively recent addition to the ASX 200, with trading of its Chess Depository Interests (CDIs) – which represent Alcoa’s U.S. common stock on a 1:1 basis – commencing in July 2024, following its acquisition of the previously ASX-listed Alumina. 

The rationale for this switch is based on three key considerations: 

1. Pureplay exposure – Alcoa provides the purest exposure to the favourable fundamentals of the aluminium market, given its sole focus on the aluminium value chain. This contrasts with other ASX-listed aluminium producers, South32 and Rio Tinto, whose earnings are diversified across a broader range of commodities (including some with weaker fundamentals). Alcoa is also expected to modestly grow its aluminium and alumina volumes over the medium-term. In contrast, South32 and Rio Tinto’s aluminium volumes are projected to remain broadly flat or decline, potentially exacerbated by smelter closures (i.e. Tomago, Mozal). Consequently, Alcoa provides the highest EBITDA leverage to aluminium price movements, positioning it to benefit from rising prices over time (our base case).
2. High quality asset portfolio – Alcoa’s portfolio is supported by secure long-term power agreements concentrated in stable Tier 1 jurisdictions, with ~90% of production in Canada, the US, Australia, Norway and Iceland. In contrast, South32’s aluminium assets are in Tier 2 and Tier 3 markets, namely Brazil, South Africa and Mozambique, which face greater risks regarding power access, regulatory and political stability, social unrest, and infrastructure reliability. In addition, Alcoa is a leader in ‘green aluminium’, with ~85% of its smelting portfolio powered by renewable energy. Lastly, thanks to its scale, vertical integration, low-cost (first quartile) bauxite and alumina assets, cheap and reliable power access, and recent restructuring (closure of higher-cost smelters), Alcoa sits in the lower half the aluminium cost curve, supporting through-the-cycle profitability.
3. Strong operational track record – Alcoa’s recent operational performance has generally outperformed South32’s, which has faced multiple large asset impairments in recent years - including at Mozal Aluminium and Worsley Alumina, among several others. Notably, the anticipated mid-2026 closure of Mozal Aluminium appears not fully reflected in consensus forecasts or market pricing. Moreover, we are cognisant of operational risks facing South32’s Hillside Smelter in South Africa. This asset faces uncertainty around the reliability of power supply due to its contractual terms that allow the utility to interrupt supply when required to support grid stability (in a country facing significant energy supply issues). In contrast, Alcoa has demonstrated strong execution – consistently meeting its production/cost guidance, achieving record production at five smelters in Q3, completing the highly astute Alumina acquisition last year, and operating with minimal asset-level disruptions from power outages, technical malfunctions, political/regulatory instability, civil unrest, or natural disasters.