(The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, April 16 (Reuters) - The Iran war is triggering an unprecedented crisis in the global aluminium market with potentially devastating knock-on effects across sectors as diverse as construction, packaging, transport and green energy.
Even if the war were to end tomorrow, it could take up to a year for Emirates Global Aluminium to recover from the damage inflicted by a missile strike on its Al Taweelah smelter last month.
Aluminium Bahrain (ALBH.BH) , the largest single-site production plant outside of China, has also been hit, although the extent of the damage is currently unknown. Alba had already reduced output prior to the attack, as had Qatar Aluminium, due to a shortage of power.
With shipping through the Strait of Hormuz severely constrained, the loss of production could rise further as smelters run through their stocks of raw materials.
The global market is looking at a supply deficit of up to 4 million metric tons this year, according to consultancy Wood Mackenzie.
Western buyers will bear the brunt of that massive supply hit and policymakers will face some hard choices in the weeks ahead if they want to cushion the impact.
<h3>THIN INVENTORY COVER</h3>
In times gone by the market could have turned to the London Metal Exchange (LME) for extra metal. Registered inventory exceeded 5 million tons in the first part of the last decade.
LME stocks have since shrunk to under 400,000 tons with another 100,000 tons sitting in the off-warrant category.
CME warehouses have also been raided. Total deliverable stocks have slumped by 70% since the start of the year and now total just 1,864 tons.
Even those figures flatter to deceive. Russian metal, which many Western users can’t use due to sanctions imposed after the invasion of Ukraine, accounted for 270,000 tons of registered LME inventory at the end of March.
Traders have been tussling over the non-Russian component. Someone cancelled 98,000 tons of LME-registered Indian aluminium in the first week of March, only to re-warrant most of it last week as time-spreads exploded.
The benchmark cash-to-three-months spread (CMAL0-3) flexed out to a backwardation of $95.50 per ton, the tightest the market’s been since 2007.
<h3>POWER CONSTRAINTS</h3>
There is idled smelter capacity, particularly in the U.S. and Europe, that could in theory be reactivated to help alleviate the squeeze on physical metal supplies.
However, most of this capacity was taken offline during previous energy crises. Smelters produce metal by electrolysis, and a typical one can use as much power as a city the size of Boston.
Given the impact of the Iran war on energy prices, it seems highly unlikely much, if any, of the mothballed capacity will return.
Indeed, the global shortage of affordable power was already forcing more closures even before the start of hostilities in the Gulf.
The Mozal aluminium smelter in Mozambique, majority owned and operated by Australia’s South32 (S32.AX) , was placed on care and maintenance in March after the company failed to get an economically viable power supply contract.
Even allowing for greater recycled production and softer demand due to the energy hit on manufacturing activity, “there is no escaping a large deficit in the global aluminium market over the next 18 months,” according to Wood Mackenzie.
<h3>UNPALATABLE CHOICES</h3>
That deficit is going to be felt most acutely in the West, which is going to force governments to make some unpalatable choices.
Two countries could help alleviate the shortfall.
The first is China, the world’s largest aluminium producer. The problem is that China tends to process most of its metal into semi-manufactured products such as rod, plate and wire.
The rest of the world has spent the last decade erecting trade barriers against the Chinese export flood, accusing Beijing of undermining competitors.
Western aluminium users need primary metal and alloy, not more cheap Chinese product exports.
That leaves Russia, which produces both primary metal and the array of value-added alloys produced in the Gulf.
Japanese manufacturers are already showing signsof returning to Russian supply, having self-sanctioned after the 2022 invasion.
U.S. and European buyers would need government sanction waivers to follow suit.
The situation in the United States is compounded by President Donald Trump’s decision to hike import aluminium tariffs to 50%.
That has sent the cost of imported ingot to over $2,500 per ton above the LME price (CMAL3) , which is itself hovering at four-year highs of $3,580 per ton.
For now, this remains a price and cost equation. The longer the Gulf disruption runs, the faster stocks deplete.
At some stage it may stop being a question of price altogetherand become a question of simply having enough metal to meet manufacturing orders.
(The opinions expressed here are those of Andy Home, a columnist for Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and X. And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a week.
LME aluminium stocks are low and spreads tight
<img src="https://imageproxy.pbkrs.com/https://tmsnrt.rs/4cpxKAX?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" width="2544" height="1158" original-src="https://imageproxy.pbkrs.com/https://tmsnrt.rs/4cpxKAX"/>
(Writing by Andy Home; Editing by Marguerita Choy)
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ROI-Aluminium in crisis: war, tariffs and a market running on empty: Andy Home