Iran’s Attacks on Aluminum Plants Raise Risk of Supply Crisis

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Some smelters had already begun to curtail operations. Qatar’s Qatalum has reduced production by about 40%, while Alba — as the Bahraini producer is known — had announced the shutdown of 19% of its capacity. 

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Historic Shock

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The hit to aluminum production in the Middle East threatens to be one of the biggest supply shocks in the history of the market. The two facilities struck by Iran on the weekend have a combined production of 3.2 million tons a year, while Gulf Cooperation Council countries as a whole produce more than 6 million tons — although not all suppliers ship through the Strait of Hormuz. 

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By comparison, the threat of an interruption to supplies from Russia’s United Co. Rusal PJSC, which produces about 4 million tons a year, was enough to send aluminum prices up 30% in three weeks in 2022. 

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Still, an extended closure of the strait would also cause an energy price spike that could knock global growth – and therefore hurt demand for aluminum and other industrial metals. 

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The Middle East accounts for smaller share of the world’s aluminum production than it does for oil or liquefied natural gas, but the market context is also different. While oil and gas traders had for the most part been warning of gluts before the US and Israel started their campaign against Iran on Feb. 28, aluminum traders had been gearing up for a bull market for months. 

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Available stocks on the LME, which for the past three years have been hovering around the lowest level in more than two decades, have been drawn down sharply since the war began, as traders rush to withdraw metal in anticipation of a supply squeeze. Bloomberg reported at the time that Mercuria Energy Group was the main driver of the drawdown.

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And while aluminum futures have been weighed down by investor worries about the war’s economic impact, the brewing supply squeeze can already be seen in the premiums that buyers are paying to secure physical metal. The price of aluminum billet — an alloyed form that is shaped into everything from building parts to airplanes — has jumped by 63% in Europe since the war began, according to pricing agency Fastmarkets Ltd.  

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Spot prices for aluminum have also surged above futures on the LME, in a condition known as backwardation that’s a hallmark that spot demand is exceeding supply. Cash contracts closed at a $61.23 premium over three-month futures on the LME on Friday, at the highest level since 2007.

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Analysts at Goldman Sachs Group Inc. —  which has been a bearish voice in the aluminum market for months — said on March 24 they expect a 900,000-ton deficit to emerge during the second quarter, leading to a global drawdown in inventories that would leave the global market to cover just 45 days of consumption. That’s a lower level than was seen during the energy crunch in 2022, when aluminum set its record high.

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Military Needs

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For aluminum buyers, the impact is likely to be felt over the coming months. Some shipments of aluminum from the Middle East had already cleared the Strait of Hormuz when the war began, meaning that any supply shortfall may not be felt fully until the third quarter, said Rob Van Gils, CEO of Hammerer Aluminium Industries, which manufactures aluminum products. 

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But the price move has already had an effect. Rio Tinto Group hiked its offer for aluminum in Japan to a premium of $350 over the LME price, the highest in more than a decade and up from an offer of $250 that was hastily pulled when the war began. The biggest supply squeeze is being felt in so-called value-added products — alloys of aluminum used by aircraft and auto manufacturers and in the construction industry. 

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Middle Eastern smelters were a key supplier of such products — particularly to Europe, but also to the US, where there has been growing anxiety about shortfalls in supplies of high-purity aluminum to feed the military. Aluminium Bahrain had said that it was reducing production of value-added products in favor of commodity-grade aluminum, to give it more flexibility in a period of disruption. 

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Van Gils, whose company buys commodity-grade aluminum from smelters in Iceland and Norway and sells value-added products, said his company had become much more cautious about quoting premiums for third-quarter sales given the uncertainty facing the market. 

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For industry in Europe, the prospect of a series of Middle Eastern smelter closures represents “an unbelievable threat,” he said. And that was before the strikes over the weekend.

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—With assistance from Winnie Zhu.

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