The situation in the Middle East and the resulting maritime bottlenecks are triggering a historic crisis in the aluminum market, which could have devastating ripple effects on various industries that rely on this basic metal.
Aluminum is the third most widely used metal globally, after steel. Aluminum is highly regarded for its high strength-to-weight ratio, corrosion resistance, and excellent electrical conductivity - these properties making it indispensable in various fields ranging from beverage cans, cooking foil to aerospace components and power grids. The main industries that use aluminum include packaging, transportation, defense, construction, electronics, solar energy, and power transmission. Aluminum is also used in daily consumer goods such as cookware, garden furniture, bicycle frames, and sports equipment.
Over the past 20 years, the aluminum market has been in a state of structural oversupply, with high inventories. But everything changed with the outbreak of conflicts in the Middle East and the actual blockade of the Strait of Hormuz.
Two aluminum smelters in the Gulf region were damaged in the missile attack: the Al Arabi Vitara plant under the UAE-based Global Aluminum Company (EGA), and Albin Aluminium - this is the largest aluminum production base outside China. According to data from the International Aluminum Institute (IAI), the aluminum output in the Gulf region plummeted to its lowest level in over a decade in April. Due to the attack, the price of aluminum soared to its highest level since the outbreak of the Russia-Ukraine conflict in February 2022.
Another manifestation of the aluminum supply shock is seen in the over-the-counter trading segment of the market, such as aluminum billets - these are semi-finished solid metal rods used in the transportation and construction industries.
The production losses in the Gulf region were exacerbated by the fact that the Mozal aluminum electrolysis plant in Mozambique was forced to shut down due to high energy prices.
According to data from the International Aluminum Association, the combined impact has led to a reduction of 2.4 million tons in aluminum production in Western countries over the past two months. The situation could worsen further, depending on whether the remaining Persian Gulf smelters can obtain sufficient raw materials by bypassing the Strait of Hormuz through alternative shipping routes.
An earlier article by Zero Hedge quoted Nick Snowdon, an analyst from the Geneva-based commodities consulting firm Mercuria, as warning about the global aluminum market: "The scale of the supply shock we are currently seeing in the aluminum market could be the largest single supply shock faced by the basic metals market since 2000."
Mercuria predicts that by the end of this year, the aluminum market may face a shortfall of at least 2 million tons. If the conflict between the United States and Iran continues, the situation could get even worse.
JPMorgan analysts have warned that the aluminium market is in a "black hole", meaning a "metaphorical sense of having no way out". At that point, "the global aluminium market will face severe and prolonged supply disruptions", even if shipping in the Strait of Hormuz resumes in the short term.
The situation in the Middle East is causing severe supply shortages for American Aluminum and driving up costs.
Middle Eastern countries supply approximately one fifth of the aluminum to the United States. Latitude Media reported that supply chain disruptions could have complex impacts on multiple industries, but the energy sector is particularly affected - aluminum is widely used in overhead power transmission lines, solar panel frames, wind turbine structures, as well as utility-scale and electric vehicle batteries.
The problems faced by American aluminum buyers stem from the 50% high tariff imposed by the government on imported aluminum products and their derivatives into the United States. This tariff is mainly targeted at Canada, which accounts for 60% of the total aluminum imports into the US.
However, this tariff has driven up the regional premium – the additional fee paid on top of the LME benchmark price. Latitude Media explained that, despite the increase in costs, the domestic prices in the United States still need to be raised in order to encourage foreign suppliers to continue exporting aluminum to the country.
Meanwhile, as Canada expands its market diversification beyond the United States, the volume of aluminum imports into the US has declined. Latitude Media notes that without a stable supply from the Middle East, this gap will be difficult to fill. Short-term solutions are either impractical or difficult to implement, leading aluminum buyers to rush to purchase and likely having to pay higher prices.
