The rally in aluminum prices may be far from over. The conflict in the Middle East and the blockade of the Strait of Hormuz have accelerated the depletion of raw material buffer stocks at Middle Eastern smelters. Multiple industry analysts warn that a genuine supply shortage is set to materialize over the next one to two months, potentially exerting upward pressure on prices that exceeds current market expectations.
Since the onset of the conflict, the London Metal Exchange (LME) price for aluminum has risen approximately 16%, reaching $3,655 per tonne on Friday and nearing a four-year high. JPMorgan predicts the aluminum market will see its largest annual supply-demand deficit since 2000 this year. The bank forecasts that, regardless of whether the Strait of Hormuz reopens, aluminum prices could climb to around $4,000 per tonne in the coming months.
Charvi Trivedi, an analyst at Wood Mackenzie, stated, "I'm confident most smelters' inventories are now depleted. The next one to two months are critical for aluminum prices, as this is when the tangible supply shortage is expected to truly manifest." Alcoa's CEO, Bill Oplinger, cautioned at an industry conference in Miami this month that "real physical metal shortages" could emerge in Europe or North America within the next six months.
Data from the International Aluminium Institute (IAI) shows Gulf region aluminum production plummeted 35% year-over-year in April, hitting a low not seen in over a decade. IAI Secretary General Jonathan Grant characterized the current situation as a "slow-motion supply chain shock" and warned that the decline may not have bottomed out yet.
**Inventories Dwindle, Shortage Window Nears**
Aluminum, widely used in products from Ford F-150 trucks to beverage cans, has seen its price gains lag behind commodities like crude oil, liquefied natural gas, and fertilizers since the conflict began. One reason is that smelters previously held buffer stocks of raw materials sufficient for several weeks of operation, which initially tempered market anxiety. However, with the continued blockade of the Strait of Hormuz, these reserves are nearly exhausted.
Trivedi explained that smelters are now replenishing raw materials via land routes, but this method's capacity is far inferior to the previous imports of alumina and other materials via the strait. She estimates aluminum production losses in the Middle East could reach 3.5 million tonnes this year—roughly half the region's recent annual output—potentially shrinking global supply by nearly 3%.
Even if the strait reopens, it would take smelters about six months to resume normal production, with repairs to damaged facilities possibly taking longer. "It's not as simple as plugging it back in," Trivedi noted.
**Scale of Production Cuts and Market Deficit**
Before the conflict, approximately one in every ten tonnes of global aluminum originated from the Middle East, with most exported to the U.S., Europe, and Japan. The sharp decline in Gulf region production in April has directly reduced the flexibility of the global supply side.
Morgan Stanley offered an explanation for aluminum's price gains falling short of some investor expectations: significant pre-conflict stockpiling may have provided buyers a buffer. Meanwhile, regional premiums in the U.S., Europe, and Japan have surged significantly, absorbing some of the price pressure.
Nevertheless, Jefferies has recently fielded numerous investor calls and emails inquiring how much higher aluminum prices could climb. The firm's analyst, Chris LaFemina, stated, "I'm inclined to agree with the bullish view—if the bottleneck at the Strait of Hormuz isn't resolved, prices must continue rising for the market to rebalance."
Not everyone anticipates an immediate, sharp price surge. Andy Farida, an analyst at Fastmarkets, believes a period of consolidation is reasonable given the substantial price increase already seen. Other market participants cite weak demand signals, high global inventories, and elevated investor long positions as reasons for caution.
Trivedi views a global recession as the most significant downside risk for aluminum prices. The International Monetary Fund (IMF) has warned that a prolonged blockade of the Strait of Hormuz increases the risk of a deep global economic downturn. "Only in that scenario could supply and demand meet again at some level," she said.
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