Middle East Tensions Impact Enters Industrial Reality, Aluminum Prices May Be Systematically Undervalued

(Source: Steel Union Energy Academy)

Key Points

1. The duration of the conflict has fully exceeded market expectations. The Strait of Hormuz blockade has evolved from a “short-term negotiation tactic” into a sustained supply chain disruption. The previous pricing framework based on a “quick resolution” assumption has become clearly invalid.

2. The impact has broken through logistics layers and substantially transmitted to smelting. If the Strait remains blocked for more than 1–2 weeks, the Middle East could face passive reductions of 300,000–500,000 tons/year in electrolytic aluminum capacity, with ongoing risks of further cuts.

3. The net increase in overseas supply by 2026 has been passively revised downward. Confirmed reductions have largely offset the year’s new capacity additions, and global electrolytic aluminum supply still faces further downward pressure.

4. Supply reductions and terminal stockpiling are resonating, with overseas spot premiums expected to remain high. The scarcity premium for spot aluminum will continue to exist.

5. The reconfiguration of domestic and international price spreads will change trade flows. The import arbitrage window closing will reduce China’s aluminum ingot imports while boosting China’s exports of aluminum and aluminum products.

6. Demand resilience combined with supply contraction is widening the global supply-demand gap. The global aluminum market is shifting from a tight balance to a structural shortage.

7. The “easy to reduce, difficult to restore” characteristic of electrolytic aluminum production determines that supply recovery will lag. Aluminum prices are systematically undervalued, and a mid-point upward adjustment is fundamentally justified.

Main Text

The geopolitical conflict in the Middle East is no longer just a “geopolitical topic” for the aluminum market but has truly entered a stage of capacity reduction, logistics interruption, raw material imbalance, and rising costs occurring simultaneously. If in the early stages, market price increases could be attributed to sentiment and risk premiums, now, with Qatar announcing a 40% reduction and Bahrain Aluminum announcing a 19% cut, the market can no longer interpret the Middle East situation with a linear “event impact followed by quick recovery” mindset. The market’s pricing of Middle Eastern aluminum supply shocks remains significantly undervalued.

Conflict exceeds expectations, full impact of the Strait of Hormuz blockade

Initially, the market expected the conflict to quickly resolve following the death of Iran’s Supreme Leader, with the Strait blockade seen as a short-term negotiation leverage that would be lifted within days. However, as of March 15, the 16th day of the war, the situation has diverged sharply from expectations. The involvement of multiple parties has narrowed the ceasefire window; Iran’s new Supreme Leader, Moojtaaba, has explicitly refused to surrender, fundamentally breaking the “decapitation equals quick victory” logic. Currently, all three sides show no willingness to compromise, and the duration has already far exceeded market estimates.

As the conflict prolongs, the Strait of Hormuz blockade will also extend well beyond previous expectations. The impact on the aluminum industry chain will be systemic: the Middle East accounts for about 9% of global electrolytic aluminum capacity; the blockade directly cuts off sea transport routes for raw materials and finished products. Meanwhile, tightening natural gas supplies push up energy costs for electrolysis, and market pricing has significantly underestimated these transmission effects. If the blockade persists, pressures on the aluminum supply chain will be higher than previously anticipated.

From logistics disruption to smelting reductions: ongoing deepening of Middle Eastern aluminum chain impact

Following Qatar’s 40% capacity reduction due to natural gas infrastructure damage, Bahrain Aluminum announced a 19% cut due to raw material shortages. This indicates that the impact has moved beyond logistics and has substantially penetrated into the smelting sector.

Regionally, Oman’s port outside the Strait of Hormuz is unaffected, so transportation routes are not impacted, excluding it from reduction expectations. Saudi Arabia is the only Middle Eastern country with a complete bauxite and alumina industry chain; although its prebaked anode self-sufficiency is not 100%, its proximity to the Red Sea and relatively limited import needs make land transport via the Red Sea feasible, thus not included in reduction forecasts. The UAE has some alumina capacity but cannot fully meet its electrolytic aluminum needs, so raw material shortages could also lead to reductions.

Data source: Mysteel

Regarding raw material inventories, Mysteel’s survey shows alumina stocks generally last about 4–6 weeks, bauxite about 2–3 months, and prebaked anodes about 2–3 months. Structurally, prebaked anodes have a relatively high self-sufficiency rate of about 87.6%, with limited short-term impact from external logistics disruptions. Alumina, however, is the most vulnerable link: Middle Eastern (excluding Oman) alumina imports are about 8.46 million tons annually, highly dependent on sea transport, with the weakest risk resistance.

Based on this, Bahrain’s current reduction is unlikely to be an isolated case; other Middle Eastern electrolytic aluminum producers face similar situations. When raw material inventories fall below 2 weeks, these companies will be forced to initiate reductions, prioritizing the shutdown of higher-cost or older equipment. Larger capacity regions tend to reduce faster once triggered. For example, Bahrain, the second-largest electrolytic aluminum producer in the Middle East, has already seen about a 19% reduction, which is significant. However, current reductions are still insufficient to ensure alumina inventories can operate safely long-term. If the Strait remains blocked, pressure on Bahrain’s alumina inventories will continue to accumulate, and the possibility of larger-scale reductions in the short term cannot be ignored. Considering the capacity structure and raw material supply in the Middle East, Mysteel conservatively estimates that if the Strait remains closed for another 1–2 weeks, 300,000–500,000 tons/year of electrolytic aluminum capacity could be passively reduced; ongoing shipping disruptions and raw material supply issues could further enlarge the reduction scale.

New capacity cannot offset reduction impacts; overseas electrolytic aluminum supply may turn negative

Looking at annual plans, overseas electrolytic aluminum capacity in 2026 does see some growth, but these new capacities are not released all at once at the start of the year; instead, they are gradually commissioned quarterly and ramped up slowly. According to Mysteel, the new overseas capacity in 2026 is about 1.655 million tons/year, with an actual annual increase of about 1.09 million tons.

As aluminum prices rise and spot premiums strengthen, market concerns grow that high prices could revive idle overseas capacity. However, these concerns remain limited. European electrolytic aluminum faces significant power constraints; for example, the San Ciprián smelter in Spain has delayed restart to mid-2026 after a major blackout in 2025 caused grid stability issues. Additionally, about 1.8 million tons of capacity in Europe rely on natural gas for power, and the TTF natural gas prices have surged about 56% due to Middle East conflicts, sharply increasing energy and smelting costs. Other regions also face electricity price increases, and with global energy prices rising overall, resumption of production remains difficult to accelerate. Mysteel estimates that, in the most optimistic scenario, global electrolytic aluminum capacity in 2026 could see a net increase of about 317,000 tons/year, with an added output of roughly 160,000 tons. If energy prices continue to rise, the scale of resumption could be further suppressed, even leading to some reductions.

However, current supply-side uncertainties are rapidly eroding this growth potential. Confirmed reductions include: Mozambique (~560,000 tons/year), Qatar (~254,000 tons/year), Bahrain (~304,000 tons/year), totaling about 1.118 million tons of capacity, reducing 2026 output by approximately 920,000 tons. Based on this, the net increase in overseas electrolytic aluminum in 2026 is only about 330,000 tons. Considering the supply chain shocks from the Strait blockade, supply risks will continue to grow. Combining raw material inventory depletion cycles, Mysteel boldly estimates that if the Strait remains blocked, overseas electrolytic aluminum output in 2026 could shift from previously expected growth to negative growth.

Supply disruptions and preemptive stocking resonate, overseas aluminum spot market tightens rapidly

According to Mysteel, in 2025, Middle Eastern (excluding Oman) electrolytic aluminum exports were about 4.51 million tons, accounting for roughly 70% of total regional output, with the UAE, Bahrain, and Qatar as main exporters. Due to heavy reliance on sea exports, the Strait blockade directly disrupts regional raw aluminum shipments. Bahrain Aluminum has already announced force majeure suspension of some exports, which has first impacted the overseas spot market and rapidly intensified supply tightness.

Under supply tightening expectations, overseas spot premiums have begun to widen significantly. Rio Tinto has suspended negotiations with Japanese clients on Q2 aluminum premiums and withdrew its previous offer of a $250/ton premium. Given rising supply uncertainties, further increases in aluminum premiums are expected.

Overseas electrolytic aluminum spot premiums

Data source: Mysteel

Meanwhile, end-user stockpiling behavior has also advanced noticeably. When terminal users perceive ongoing tightness in spot supply, they lock in inventories early to reduce procurement risks. Since the Strait closure, LME aluminum cancelation warrants have increased sharply, from an average of 49,000 tons daily in February to 116,000 tons in March, reflecting a significant rise in overseas consumption demand.

LME aluminum cancelation warrants and ratio

Data source: LME, Mysteel

Even if the Strait’s navigation resumes later, it will take time for raw aluminum supplies in the Middle East to fully return to the market. On one hand, accumulated shipping orders and port dispatch arrangements during the blockade need to be gradually cleared, and logistics recovery will be delayed. On the other hand, some smelters have already reduced production, causing substantial regional supply contraction. In the short term, supply may not quickly rebound, and spot market shortages could persist, keeping overseas premiums high.

Rising premiums will further restrict import windows, boosting China’s aluminum exports

Against the backdrop of tightening overseas primary aluminum supply and expanding spot premiums, the domestic and international price spreads have widened significantly. Overseas aluminum prices now reflect not only LME prices but also a substantial premium for spot scarcity and supply chain risks. This means that, although LME aluminum prices have risen, the increasing overseas spot premiums raise the overall cost of overseas procurement, effectively closing the arbitrage window or even causing backwardation. As a result, aside from rigid imports via long-term contracts with Rusal and through processing trade channels, elastic imports driven by price will decline markedly. China’s net aluminum ingot imports are expected to shrink.

Meanwhile, China’s role as the world’s largest aluminum processing hub is also boosting its export appeal. On one hand, with outbound shipments from the Middle East hindered and overseas spot supply tight, overseas buyers will prefer sourcing from China to ensure terminal demand, whether for aluminum, aluminum products, or finished goods. On the other hand, the expansion of overseas premiums effectively increases profit margins for Chinese resources entering international markets, strengthening export willingness. Consequently, the overseas supply gap not only reduces China’s aluminum ingot imports but also, through increased exports, tightens domestic resource balance, supporting domestic aluminum prices.

Global electrolytic aluminum supply-demand gap widens significantly

Based on global supply-demand estimates, under the ongoing US-Iran conflict and Strait blockade, growth in primary aluminum supply is severely limited, while terminal demand remains resilient. Mysteel forecasts that China’s supply-demand will remain tight in 2026, with a shortfall of about 250,000 tons; overseas production cuts will directly influence the global supply gap. Previously, it was boldly predicted that the overseas supply gap could expand to about 820,000 tons, with the overall global electrolytic aluminum deficit reaching 1.07 million tons.

Global electrolytic aluminum supply-demand balance (10,000 tons)

Data source: Mysteel

The production characteristics of electrolytic aluminum cause supply recovery to lag, leading to systematic undervaluation of prices

Previously, the market generally regarded this round of aluminum price increases as “geopolitical sentiment trading,” expecting prices to quickly revert once ceasefire and shipping resumed. However, while risk premiums will indeed partially decline as conflicts ease, the actual damage to supply and the upward shift of cost midpoints are difficult to repair simultaneously. Once an electrolytic line is shut down, restarting typically takes several months, involving equipment maintenance, raw material inventory rebuilding, and logistics recovery. For example, Qatar’s earlier capacity reduction due to natural gas supply issues requires 6–12 months for system restoration after electrolytic cells are shut down. Even if geopolitical tensions temporarily ease, supply recovery will be delayed, and the speed of closing the supply gap will be much slower than market sentiment recovers.

More importantly, this conflict is not occurring during a loose supply cycle but on a foundation of already tight or even structurally deficient global aluminum supply and demand. The physical shortages caused by Middle Eastern capacity cuts, the overall upward shift of the cost curve driven by rising natural gas and electricity prices, and the reconfiguration of trade flows will provide sustained fundamental support for aluminum prices. Even if macro sentiment remains pessimistic in the short term, and non-ferrous metal prices face downward pressure, aluminum prices will experience phase fluctuations. But these factors mainly influence the price rhythm rather than the long-term price level. Currently, aluminum prices are still significantly undervalued relative to the impact of supply contraction and cost increases. As physical shortages in overseas markets expand and inventories deplete, the systemic upward shift of the price center has a solid foundation.