Iran’s Attacks on Aluminum Plants Raise Risk of Supply Crisis

Iran’s weekend strikes on Middle Eastern aluminum plants are threatening to send a fragile market into crisis, raising the prospect of record prices for the metal used in everything from airplanes to food packaging and solar panels.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Iran’s weekend strikes on Middle Eastern aluminum plants are threatening to send a fragile market into crisis, raising the prospect of record prices for the metal used in everything from airplanes to food packaging and solar panels.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.On the first day of trading after two major producers confirmed attacks by Iranian drones and missiles, aluminum futures on the London Metal Exchange surged nearly 6% — the most since 2024. The region’s top supplier, Emirates Global Aluminium, said on Saturday it sustained “significant damage” at its site in Abu Dhabi, while Aluminium Bahrain said it was assessing the extent of damage to its facility. Even before the industry became a direct target, the closure of the Strait of Hormuz had left the Middle East’s giant smelters running short of key input ingredients, and the industry had been bracing for a cascading series of production cuts in the coming weeks.

The Middle East accounts for about 9% of global production.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.“Traders need to face the reality of significant cuts to Middle East supplies,” said Li Xuezhi, head of research at Chaos Ternary Futures Co. “The bombing was not the base-case scenario.”Shutting down and restarting an aluminum smelter is a lengthy and costly task, and the strikes on two of the world’s biggest facilities raise the risk that the impact on global production may persist long after the strait is reopened. The conflict’s impact is being amplified because constraints on production elsewhere have eroded global inventories, leaving the market with little buffer against shocks.Aluminum is the most widely used metal after steel, and a sustained price spike would heap further pressure on manufacturers already reeling from the surge in energy costs. Potentially more worrying for the global economy, the disruption to supplies could be so acute that some industrial consumers of aluminum will run out of certain specialized products, forcing factories into temporary shutdowns. Aluminum pared its initial surge to trade 4% higher at $3,428.50 a ton by 11:00 a.m. Shanghai, with traders awaiting more clarity on the extent of damage to the facilities. Shares in aluminum companies also rose, with Australia’s South32 Ltd. up as much as 8.2% and Aluminum Corp. of China gaining nearly 9%.Confirming the strikes in a statement to Iranian state media on Saturday, the nation’s Islamic Revolutionary Guard Corps. said the two companies were suppliers to the US military, and that the action was retaliation for US-Israeli strikes on infrastructure in Iran.“The aluminum supply chain has entered a new phase of disruption,” AZ Global Consulting said in a note after the attacks. “We will wait to hear from both companies, but it is clear the system is now exposed to sudden production loss, not just gradual constraint.”Prices have swung wildly since the war begun, surging at the start of the conflict, but later easing due to growing worries about the global economic impact of the war. Traders and industry executives have been warning that if shipping doesn’t resume soon in the Strait of Hormuz, the inevitable production cuts would drive prices beyond 2022’s record high of $4,073.50 a ton.Some smelters had already begun to curtail operations. Qatar’s Qatalum has reduced production by about 40%, while Alba — as the Bahraini producer is known — had announced the shutdown of 19% of its capacity. Historic ShockThe hit to aluminum production in the Middle East threatens to be one of the biggest supply shocks in the history of the market. The two facilities struck by Iran on the weekend have a combined production of 3.2 million tons a year, while Gulf Cooperation Council countries as a whole produce more than 6 million tons — although not all suppliers ship through the Strait of Hormuz. By comparison, the threat of an interruption to supplies from Russia’s United Co. Rusal PJSC, which produces about 4 million tons a year, was enough to send aluminum prices up 30% in three weeks in 2022. Still, an extended closure of the strait would also cause an energy price spike that could knock global growth – and therefore hurt demand for aluminum and other industrial metals.

The Middle East accounts for smaller share of the world’s aluminum production than it does for oil or liquefied natural gas, but the market context is also different. While oil and gas traders had for the most part been warning of gluts before the US and Israel started their campaign against Iran on Feb. 28, aluminum traders had been gearing up for a bull market for months. Available stocks on the LME, which for the past three years have been hovering around the lowest level in more than two decades, have been drawn down sharply since the war began, as traders rush to withdraw metal in anticipation of a supply squeeze. Bloomberg reported at the time that Mercuria Energy Group was the main driver of the drawdown.And while aluminum futures have been weighed down by investor worries about the war’s economic impact, the brewing supply squeeze can already be seen in the premiums that buyers are paying to secure physical metal. The price of aluminum billet — an alloyed form that is shaped into everything from building parts to airplanes — has jumped by 63% in Europe since the war began, according to pricing agency Fastmarkets Ltd. Spot prices for aluminum have also surged above futures on the LME, in a condition known as backwardation that’s a hallmark that spot demand is exceeding supply. Cash contracts closed at a $61.23 premium over three-month futures on the LME on Friday, at the highest level since 2007.Analysts at Goldman Sachs Group Inc. — which has been a bearish voice in the aluminum market for months — said on March 24 they expect a 900,000-ton deficit to emerge during the second quarter, leading to a global drawdown in inventories that would leave the global market to cover just 45 days of consumption. That’s a lower level than was seen during the energy crunch in 2022, when aluminum set its record high.Military NeedsFor aluminum buyers, the impact is likely to be felt over the coming months. Some shipments of aluminum from the Middle East had already cleared the Strait of Hormuz when the war began, meaning that any supply shortfall may not be felt fully until the third quarter, said Rob Van Gils, CEO of Hammerer Aluminium Industries, which manufactures aluminum products. But the price move has already had an effect.

Rio Tinto Group hiked its offer for aluminum in Japan to a premium of $350 over the LME price, the highest in more than a decade and up from an offer of $250 that was hastily pulled when the war began. The biggest supply squeeze is being felt in so-called value-added products — alloys of aluminum used by aircraft and auto manufacturers and in the construction industry. Middle Eastern smelters were a key supplier of such products — particularly to Europe, but also to the US, where there has been growing anxiety about shortfalls in supplies of high-purity aluminum to feed the military. Aluminium Bahrain had said that it was reducing production of value-added products in favor of commodity-grade aluminum, to give it more flexibility in a period of disruption. Van Gils, whose company buys commodity-grade aluminum from smelters in Iceland and Norway and sells value-added products, said his company had become much more cautious about quoting premiums for third-quarter sales given the uncertainty facing the market. For industry in Europe, the prospect of a series of Middle Eastern smelter closures represents “an unbelievable threat,” he said. And that was before the strikes over the weekend.—With assistance from Winnie Zhu.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.