The global aluminum market is entering a situation that even experienced commodity market observers classify as exceptional. Disruptions resulting from the war in the Middle East are affecting an industry that already has limited reserves and is indispensable for key industries such as transportation, construction, and packaging. According to experts at Mercuria, the market could slip into a massive supply deficit by year-end. The result is growing concerns about supply security, tight inventories, and a price surge that has already pushed aluminum on the London Metal Exchange to its highest level in four years.
Aluminum faces an unusually large supply shock
The Middle East plays a significantly larger role in the aluminum sector than many market participants outside the industry may realize. The region has approximately seven million tons of annual smelting capacity. This corresponds to roughly 9% of the global supply expected for this year. If part of this capacity fails due to geopolitical disruptions, transportation problems, or restricted raw material flows, it has an immediate impact on an already tightly balanced market.
The commodity trader Mercuria describes the current development as probably the largest single supply shock that a base metal market has experienced since 2000. According to the experts’ assessment, this is already a “black swan” event—a development that was hardly foreseeable on this scale.
The trigger for the recent price movement was growing concerns about supply disruptions resulting from the US-Israeli war with Iran. These concerns drove the aluminum price on the London Metal Exchange to $3,672 per ton on April 16, reaching a four-year high. For a market heavily characterized by industrial demand and reliable supply chains, this movement is a clear signal.
Deficit of at least two million tons possible
Mercuria expects the aluminum market to show a deficit of at least approximately two million tons between now and year-end. According to analysts’ assessment, this estimate could even be conservative. It assumes that the supply of alumina via the Strait of Hormuz improves in the short term and that some smelters can resume production this quarter.
Alumina is an important precursor for aluminum production. If these supply flows to the Gulf region are restricted, it can additionally burden smelter production. Should the conflict continue longer and the supply of alumina remain limited, a larger deficit would be possible according to Mercuria.
The comparison with existing inventories is particularly critical. The expected shortfall of at least two million tons is offset by only approximately 1.5 million tons of visible inventories. Including non-visible units, global total inventories are estimated at slightly more than three million tons. Thus, the market has only limited buffers to compensate for a major outage in the Middle East.
Replacement for aluminum from the Middle East is barely available
A central problem is that aluminum from the Middle East cannot simply be replaced. While China is the world’s largest producer, it is subject to an annual production cap of 45 million tons. In the US and Europe, there is little idle capacity that could be brought back online in the short term.
As a result, Western markets are particularly exposed to the current shock. Mercuria sees the US and Europe as especially vulnerable because inventories are low in both regions. At the same time, both regions depend on imports from the Middle East.
The figures show the extent of this dependence. Last year, the US imported 3.4 million tons of primary and alloyed aluminum. Nearly 22% of this came from the Middle East. During the same period, Europe sourced approximately 1.2 million tons, or 18.5% of its imports of primary and alloyed aluminum, from the region. When these deliveries falter, shortages quickly emerge in both markets.
Aluminum remains a key raw material for industry and supply chains
The importance of aluminum extends far beyond metal trading. The metal is a central material for transportation, construction, and the packaging industry. Disruptions on the supply side can therefore not only move prices but also strain industrial supply chains.
The current situation differs from typical cyclical market fluctuations. It is not solely about stronger demand or a temporary inventory movement, but rather the question of whether a significant production and supply region will be permanently restricted. This is precisely why the shock is weighted so highly by Mercuria.
For the aluminum market, the focus is now primarily on the development of supply flows. It will be crucial whether the transport of alumina via the Strait of Hormuz stabilizes and whether affected smelters can resume production promptly. If these conditions are not met, the already expected deficit could grow further.
