The effects of the US/Israel-Iran war and the resulting disruption to shipping through the strait of Hormuz on the aluminium market has been called the greatest supply shock to any base metal market in the 21st century.
Analysts are calling it a black swan event that could lead to a multimillion tonne deficit in a market where even a mild shortage of available material was almost unheard of until recently. But a lack of information regarding the extent of production curtailments at aluminium smelters in the region has caused exchange prices and premiums to flatten in recent weeks, and many market participants are likely underestimating the magnitude of the long-term effects on global aluminium supply.
The sheer numbers attached to aluminium production in the region ensure this disruption dwarfs the previous major supply shock in the aluminium market, which occurred following Russia's invasion of Ukraine in 2022. Around 6mn t of aluminium is produced by smelters located on the coast of the Mideast Gulf. Around 85pc of this material is exported through the strait of Hormuz, with half of that volume sent to Europe and the US, and up to 40pc dispatched to Asian importers. All of that has now stopped because of the closure of the strait.
Only Saudi Arabia's Ma'aden smelter is fully integrated with domestic bauxite and alumina production, which means every other producer in the region must import raw material through the same closed strait to maintain production. While the strait remains closed, smelters are running down alumina stocks and face inevitable curtailments. It is likely that significantly more capacity has already shut than has been announced by the region's producers.
Qatar's Qatalum is running at around 60pc capacity after a cut in gas supply following a drone attack on the Ras Laffan LNG export terminal on 2 March, it announced at the end of April. Aluminium Bahrain (Alba) announced the shutdown of three reduction lines totalling about 300,000 t/yr, or 19pc of its total output capacity, on 16 March in response to supply constraints caused by shipping delays through the strait of Hormuz. Alba's facilities then sustained damage from a missile strike on 28 March, while Emirates Global Aluminium was also hit by missiles on the same day, sustaining significant damage that caused production to halt at its 1.6mn t/yr Al Taweelah smelter.
All told, around 2.2mn t/yr of capacity has been lost in the region, according to various company announcements, amounting to more than a third of the region's output. But there are indications that the real figure is higher.
Companies that use satellite data to track vessels and thermal imagery to assess smelter utilisation rates have noted a wider slowdown in production among Middle East smelters. London-based DBX Commodities estimates that an additional 480,000-950,000t of annual aluminium output has already been curtailed in the region. India-based Tathya Earth agrees with that assessment.
DBX's vessel tracking has also confirmed that alumina deliveries to smelters in the Mideast Gulf have dwindled to practically nothing since shipping ceased through the strait of Hormuz. The longer this lasts, the greater the likelihood of further curtailments.
The aluminium market has already repriced much of the war disruption, UK broker Sucden Financial said. The London Metal Exchange (LME) price briefly surged toward the top of its recent range as the conflict escalated, but repeatedly failed to hold above $3,650/t, indicating that the market struggled to justify another major step higher without a further supply deterioration.
The immediate "shock repricing" has happened and aluminium is now trading at a tighter balance, rather than a pure panic premium, Sucden said.
But official LME aluminium prices remain some way below their record high of just below $4,000/t, recorded in 2022 following the invasion of Ukraine. Those highs were reached amid a post-Covid rebound in aluminium demand and were swiftly followed by a sharp price fall as global trade flows adjusted around western restrictions on dealing with Russian material.
A much more depressed demand picture today may limit price increases to some extent. But given that the disruption represents a far bigger threat to global supply levels than in 2022, and the nature of aluminium smelters mean that any lost output could take a year or more to recover, even if the US-Iran war is resolved swiftly and the strait of Hormuz fully reopens to commercial shipping, the real effect on global aluminium availability and on prices from production already lost in the region may end up being significantly bigger than what has been acknowledged so far.
