Aluminum Supply Crisis in the Middle East

Qatalum, in Qatar, has reduced its production by approximately 40 percent, while Alba—the Bahraini producer—had announced the closure of 19 percent of its capacity. The impact on aluminum production in the Middle East threatens to become one of the largest supply crises in the history of the market. The two plants affected by Iran have a combined production of 3.2 million tons per year, while the Gulf Cooperation Council countries as a whole produce more than 6 million tons, although not all suppliers ship through the Strait of Hormuz. For comparison, the threat of a supply disruption by the Russian company United Co. Rusal PJSC, which produces around 4 million tons per year, was enough to cause aluminum prices to rise by 30 percent in three weeks in 2022. However, a prolonged closure of the strait could also cause a sudden spike in energy prices, which would slow global growth and harm demand for aluminum and other industrial metals. Iran's weekend attacks on aluminum plants in the Persian Gulf threaten to plunge an already fragile market into a crisis, increasing the likelihood of record prices for this metal, used in everything from airplanes to food packaging and solar panels. On the first trading day after two major producers confirmed drone and missile attacks by Iran, futures on the London Metal Exchange soared by 6 percent. The Middle East represents about 9 percent of global production, but its impact is being amplified because production constraints in other regions have reduced inventories, leaving the market with little buffer to absorb any impact. Even before the industry became a direct target, the closure of the Strait of Hormuz had caused a shortage of key inputs at the massive smelters of the Middle East, and the industry had been preparing for a series of cascading production cuts in the coming weeks. The main aluminum supplier suffers 'significant damage' to its facilities. The main supplier in the region, Emirates Global Aluminium, reported having suffered 'significant damage' to its facilities in Abu Dhabi, while Aluminium Bahrain said it was assessing the extent of the damage at its plant. 'Operators must face the reality of significant supply cuts from the Middle East,' said Li Xuezhi, head of research at Chaos Ternary Futures. Shutting down and restarting an aluminum smelter is a long and costly task, and strikes at two of the world's largest facilities increase the risk that the effect on global production will persist long after the strait reopens. Aluminum is the most used metal after steel, and a sustained rise in its price would exert even more pressure on manufacturers, which are already reeling from rising energy costs. Iran's attacks would cause a crisis in aluminum supply. What could be even more concerning for the global economy than the supply disruption is that it could be so severe that some industrial consumers would be left without certain specialized products, forcing factories to shut down temporarily. Aluminum on the LME rose 3.2 percent and closed in London at $3,400 per ton. Shares of aluminum companies also rose, with Alcoa climbing as much as 13 percent and Century Aluminum surging more than 20 percent in New York. In a statement sent on Saturday to Iranian state media, the country's Islamic Revolutionary Guard Corps confirmed the attacks and stated that the two companies were suppliers to the US military, and that the action was a retaliation for US and Israeli attacks on Iranian infrastructure. 'Aluminum supply chain enters a new phase of disruption.' 'The aluminum supply chain has entered a new phase of disruption,' stated AZ Global Consulting in a statement following the attacks. 'We will wait to receive information from both companies, but it is evident that the system is now exposed to a sudden loss of production, not just a gradual restriction.' Prices have fluctuated wildly since the start of the war, spiking at the beginning of the conflict and then moderating due to growing concerns about the global economic impact of the war. Traders and executives in the sector have warned that if maritime shipping does not resume soon in the Strait of Hormuz, the inevitable production cuts would push prices above the all-time high of $4,073.50 per ton reached in 2022. Some smelters had already begun to reduce their operations.