WAR - MIDDLE EAST - ALUMINIUM IN A GLOBAL CRISIS - Filenews 19/4
The war in Iran is causing an unprecedented crisis in the global aluminium market, with potentially devastating knock-on effects in sectors such as construction, packaging, transport and green energy.
Even if the war ended tomorrow, Emirates Global Aluminium could take up to a year to recover from the damage caused by a missile attack on the Al Taweelah foundry in March.
Aluminium Bahrain B.S.C. (Alba), the largest manufacturing plant, has also been affected, although the extent of the damage is currently unknown. Alba had already reduced production before this attack, as had Qatar Aluminium, due to a lack of energy.
With shipping through the Strait of Hormuz severely curtailed, the loss of production could increase further as foundries deplete their raw material stocks. The global market is facing a supply shortfall of up to 4 million metric tons this year, according to consulting firm Wood Mackenzie.
Western buyers will shoulder the brunt of this huge supply squeeze, and policymakers will face some tough choices in the coming weeks if they want to mitigate the impact.
Idle capacity of foundries
In earlier times, the market could turn to the London Metal Exchange (LME) for additional metal. Registered stocks exceeded 5 million tonnes in the first half of the last decade.
LME shares have since shrunk to below 400,000 tonnes, with another 100,000 tonnes in the non-warrant category.
CME warehouses have also been raided. Total deliverables have fallen by 70% since the beginning of the year and now stand at just 1,864 tonnes.
Even these elements can be misleading. The Russian metal, which many Western users cannot use due to sanctions imposed after the invasion of Ukraine, accounted for 270,000 tons of LME's registered reserves at the end of March.
Traders disagree on the non-Russian element. Someone cancelled 98,000 tonnes of LME-listed Indian aluminium in the first week of March, only to reissue most of it last week as time slots skyrocketed.
The benchmark spread between cash and three-month inflated to $95.50 per tonne, the tightest level recorded in the market since 2007.
There is idle foundry capacity, particularly in the US and Europe, which could theoretically be reactivated to help ease pressure on physical metal supplies. However, most of this capacity was taken out during previous energy crises. Foundries produce metal by electrolysis, and a typical foundry can use as much energy as a city the size of Boston.
China, Russia and the deficit in the world market
This deficit will be felt more strongly in the West, which will force governments to make some unpleasant choices.
Two countries could help alleviate the deficit.
The first is China, the world's largest producer of aluminium. The problem is that China tends to process most of its metal into semi-finished products, such as bars, plates, and wires.
The rest of the world has spent the past decade erecting trade barriers against the influx of Chinese exports, accusing Beijing of undermining competitors. Western aluminium users need primary metals and alloys, no more cheap exports of Chinese products.
That leaves Russia, which produces both primary metals and a range of value-added alloys produced in the Gulf. Japanese manufacturers are already showing signs of a return to Russian supply, having imposed sanctions on themselves since the 2022 invasion. Buyers from the US and Europe will need exemptions from government sanctions to follow suit.
The situation in the United States is exacerbated by President Donald Trump's decision to increase aluminium import tariffs to 50%.
This has driven the cost of imported bars to over $2,500 per tonne, above the price of the LME, which in turn is hovering at a four-year high of $3,580 per tonne. The longer the turmoil in the Gulf lasts, the faster the reserves are depleted. At some stage, it may cease to be entirely a matter of price and become just a matter of metal sufficiency to meet manufacturing orders.
The impact of the war
Given the impact of the war in Iran on energy prices, it seems highly unlikely that much, if any, of the stalled capacity will return.
Indeed, the global lack of affordable energy has already imposed more closures even before the start of hostilities in the Gulf. The Mozal aluminium foundry in Mozambique, which is majority-owned by Australia's South32 (S32.AX) and operated by the company, was placed under care and maintenance in March after the company failed to secure a financially viable electricity supply contract.
Even taking into account the higher production of recycled products and lower demand due to the energy hit to manufacturing activity, "there is no way to avoid a large deficit in the global aluminium market in the next 18 months," according to Wood Mackenzie.
- Reuters report – Collaboration with Fileleftheros Group
