CITIC SECURITIES has released a report stating that renewed conflict between Iran and Israel has significantly increased risks to aluminum production capacity, shipping capabilities, and energy supply in the Middle East. Potential disruptions to the regional aluminum supply chain and the risk of a secondary overseas energy crisis cannot be ignored. Reflecting on the 2021-22 energy crisis, aluminum prices and the sector saw maximum gains of 60% and 100%, respectively. Looking ahead, growing concerns over aluminum supply may push prices higher than previously anticipated. Combined with strong medium to long-term supply and demand fundamentals for aluminum, the firm maintains a positive outlook for both prices and valuation multiples in the aluminum sector.
Key developments include military conflict escalation in Iran on February 28, with the situation continuing to evolve rapidly. According to The Wall Street Journal, Qatar suspended LNG production at its Ras Laffan facility on March 2 after intercepting two Iranian drones targeting key energy infrastructure. Additionally, tanker traffic through the Strait of Hormuz has nearly halted. These factors drove European LNG prices up by 45% to €46/MWh, approaching the 51% surge seen during the Russia-Ukraine conflict in 2022. Following Iran's announcement of a blockade of the Strait of Hormuz, U.S. crude oil prices rose 8% to $73 per barrel, as reported by CNBC.
CITIC SECURITIES highlights the following main points: There is a risk of disruption to electrolytic aluminum production in the Middle East. Data from ALD and SMM indicate that by 2025, the Middle East will have an annual alumina capacity of approximately 4.5 million tonnes, accounting for 2% of global supply, and an electrolytic aluminum capacity of about 6.92 million tonnes, representing 9% of the global total. Iran's projected aluminum output for 2025 is around 620,000 tonnes, or 0.8% of global production. Attacks on nearby energy infrastructure could lead to production cuts or shutdowns of these capacities. Furthermore, according to Aladdiny, a blockade of the Strait of Hormuz would severely impact the UAE and Iran, which imported over 2.8 million tonnes and 500,000 tonnes of alumina in 2023, respectively, risking raw material shortages and production halts. Oman, Qatar, and Bahrain rely almost entirely on imported alumina, primarily from Australia and India via the "Indian Ocean-Hormuz Strait-Persian Gulf" route. A blockade would completely cut off alumina supply to these countries, significantly affecting their aluminum smelters.
Concerns over a European energy crisis are intensifying, which could catalyze a substantial rise in aluminum prices both domestically and internationally. The U.S. Energy Information Administration notes that the Strait of Hormuz handles over one-quarter of global seaborne oil trade and about one-fifth of global LNG trade in 2024. Reuters reported that as of March 2, day-ahead electricity prices in Germany and France had surged by 12% and 109%, respectively, compared to the previous Friday. A prolonged blockade could lead to sustained sharp increases in oil, gas, and international electricity prices, potentially triggering a secondary energy crisis. As one of the most electricity-intensive metals, aluminum production is particularly sensitive to energy price fluctuations. According to Ember, China's energy import dependency is relatively low at 20%, and its energy costs remain competitive. Should another energy crisis occur, cost-driven aluminum price increases overseas would likely enhance the profitability of Chinese aluminum producers.
During the 2021-22 energy crisis, aluminum prices and the sector rose by 60% and 100%, respectively. In 2021, European nuclear power shutdowns and reduced Russian gas supplies caused electricity prices to soar, with some aluminum producers facing power costs as high as RMB 3 per kWh. The situation worsened after the Russia-Ukraine conflict erupted in February 2022. Between January 2021 and August 2022, European natural gas and energy prices surged by 858% and 627%, respectively, reaching $70/MBtu and €414/MWh (equivalent to RMB 3.2 per kWh), leading to the shutdown of 1.47 million tonnes of annual aluminum capacity in Europe. This catalyzed a peak increase of 60% in domestic aluminum prices and 89% internationally, with prices reaching new highs of RMB 23,674 per tonne and $3,841 per tonne. Peak aluminum profit per tonne hit RMB 7,000, and the CITIC Aluminum Industry Index rose by as much as 100%.
Narratives around AI's electricity demand and supply disruptions are strengthening, potentially reinforcing market consensus on the fragility of aluminum supply. In mid-February, Century Aluminum announced the sale of its Hawesville smelter to digital infrastructure firm TeraWulf, while Alcoa revealed plans to sell ten facilities to a data center company. The substitution effect of AI data centers on aluminum industry power allocation is becoming more concrete. On the disruption front, South32 reiterated on February 12 that its Mozal aluminum smelter in Mozambique would enter care and maintenance next month. The shutdown of the Mozal project may represent a "Cobre Panama" moment for the aluminum industry, potentially elevating market awareness of supply chain vulnerabilities.
CITIC SECURITIES remains optimistic about investment opportunities in the aluminum sector. It expects the electrolytic aluminum industry to maintain a tight balance in the first quarter, driven by liquidity-fueled price increases, before entering a significant supply-demand deficit in the second quarter. Aluminum prices are forecast to average RMB 23,500 per tonne in Q1 2026 and RMB 24,000 per tonne in Q2. Escalating tensions in the Middle East may continue to heighten supply concerns, pushing prices above prior expectations. Coupled with historically high copper-to-aluminum price ratios and valuation disparities within the sector, the firm maintains a positive outlook on both aluminum prices and sector valuation expansion.
Risk factors include intensified global trade disputes, faster-than-expected commissioning of overseas aluminum capacity, weaker-than-anticipated demand growth, a sharp rise in global energy costs, disruptions in raw material supply, and lower-than-expected dividend payout ratios among Chinese aluminum producers.
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