This summer, the market may be trading not just "the heat is increasing", but rather how an El Niño event will redistribute global rainfall, reduce agricultural supplies, disrupt mining operations, and raise electricity and fertilizer costs. What deserves the most attention is not the average temperature, but the tail scenarios: if the intensity is similar to that of 2015-16, the impact will spread from farmland all the way to food ingredients, copper mines, Yunnan electrolytic aluminum, Asian coal power, and inflation in India.
According to the information from the Pursuit Trading Platform, in Barclays' cross-asset research on May 15th, Craig Rye and others made the following core judgment: "Climate predictions are increasingly pointing to a significant El Niño occurring around midsummer of 2026; the base scenario remains a moderate to strong event, roughly comparable to 2023-24, but the tail scenarios are quite prominent. Some paths suggest the possibility of a 'super' event comparable to 2015-16."
In this framework, the most direct pressure points include cocoa, palm oil, sugar, fish meal and fish oil, copper, aluminum, and Asian electricity. The fluctuations in energy and fertilizers caused by the conflict in the Middle East act as another amplifier: The weather itself already affects crops and hydropower. If urea, ammonia, LNG and shipping are all unstable at the same time, farmers' profit margins, the working capital of food enterprises, and mining costs will all be re-priced.
The path assumption is also crucial: El Niño conditions may occur in the late spring of 2026, intensify in the summer, and peak around the end of the year; the global average temperature usually reaches its peak about four months after the El Niño intensity peaks. This means that the winter of 2026-27 may be warmer, and there is a risk of setting a new global temperature record in 2027. What really affects prices are which regions don't get rain when they should, where there are heavy rains when they shouldn't, and whether there is inventory buffer in the supply chain.
The core variable of Yunnan Aluminum is hydropower, not the aluminum plants themselves.
The current annual production capacity of primary aluminum in Yunnan is approximately 6.6 million tons, accounting for about 9% of the global primary aluminum output. The local power supply is highly dependent on hydropower, which accounts for 60% to 70% of the province's total electricity generation. The El Niño phenomenon will weaken the summer monsoon in the Bay of Bengal. If there is insufficient water during the rainy season in Yunnan, the low water levels in the reservoirs will bring the problem into the dry season.
There are corresponding samples in history. The drought in 2015-16 led to a reduction of approximately 300,000 tons of production capacity, accounting for about 20% of the production capacity at that time; in 2023-24, the production capacity required to be reduced reached 1.15 million tons, also approximately 20% of the production capacity at that time; in the dry season of 2024, by February, the operating production capacity was about 400,000 tons lower than normal, and Yunnan announced that it had suffered the most severe drought in 60 years.
Under the scenario of a super El Niño in 2026-27, the wet season from May to October in 2026 may be insufficient. The reservoirs will enter the dry season with low water levels, and the fourth quarter of 2026 to the first quarter of 2027 will become the highest-risk period. If the production reduction rate is repeated by 20%, approximately 1.3 million tons of aluminum production will be at risk, accounting for about 1.7% of the global supply.
The conflicts in the Middle East have made the aluminum market even tighter. Due to insufficient raw materials such as alumina and natural gas, or damaged facilities, about 25 million tons of global production have been cut, accounting for approximately 3.2% of the global primary aluminum supply. If the transportation of alumina through the Strait of Hormuz is restricted, more cuts may occur in the short term; about 5.5 million tons of annual aluminum capacity in the Middle East relies on maritime transportation of alumina or bauxite through the Strait of Hormuz, accounting for approximately 7.2% of the global output. The ramp-up of voluntary-suspended smelters may take 6 to 12 months, and damaged facilities may even require two years to recover.
Price elasticity is concentrated among aluminium producers. Norsk Hydro has the highest sensitivity to LME aluminium prices. For every 10% increase in LME aluminium prices, the expected EBITDA in 2026 is expected to increase by approximately 17%; for every 10% increase in realized premiums, EBITDA increases by approximately 3%. South32 corresponds to approximately 15%, and Rio Tinto approximately 4%.
