Iran’s Attacks on Mideast Aluminum Plants Threaten Supply Crisis

Link copied

Iran’s Attacks on Mideast Aluminum Plants Threaten Supply Crisis.

general :: 11hrs ago :: source - bloomberg

By Mark Burton and Jack Farchy

(Bloomberg) — Aluminum prices could be driven to record levels as Iran’s weekend strikes on Middle Eastern smelters threaten a supply crisis.

Futures traded on the London Metal Exchange surged as much as 6% on Monday after two major producers confirmed attacks by Iranian drones and missiles. 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 the 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 inputs, forcing the industry to brace for a cascading series of production cuts in coming weeks. The Middle East accounts for about 9% of global output of the metal, used in airplanes, food packaging and solar panels.

“Traders need to face the reality of significant cuts to Middle East supplies,” said Li Xuezhi, head of research at Chaos Ternary Futures Co.

LME aluminum was holding most of its gains at 2:30 p.m. in Hong Kong, trading 4.8% higher at $3,452.50 a ton.

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 effect 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 would run out of certain specialized products, forcing factories into temporary shutdowns.

Shares in aluminum companies also rose, with Australia’s South32 Ltd. up as much as 9.4% in Sydney and Aluminum Corp. of China rising 9.7% in Hong Kong.

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 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, and then easing due to growing worries about the global economic impact of the war. Traders and industry executives have warned that if shipping doesn’t resume soon in the Strait of Hormuz, the inevitable production cuts would drive prices above 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 Shock

The 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 have 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 could also cause an energy price spike that would knock global growth, and hurt demand for aluminum and other industrial metals.

The Middle East accounts for a smaller share of the world’s aluminum production than it does oil or liquefied natural gas, but the market context is also different. While oil and gas traders were 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.

And while aluminum futures have been weighed down by worries over 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 of spot demand exceeding supply. Cash contracts closed at a $61.23 premium over three-month futures on the LME on Friday, 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 cover for just 45 days of consumption. That’s lower than in 2022, when the energy crunch pushed aluminum to its record high.

Military Needs

For aluminum buyers, the impact is likely to be felt in coming months. Some shipments from the Middle East had already cleared the Strait of Hormuz when the war began, delaying the worst of the shortfall until the third quarter, said Rob Van Gils, chief executive officers of Hammerer Aluminium Industries, which manufactures aluminum products.

But the price move has already had an impact. Rio Tinto Group hiked its offer for aluminum in Japan to a premium of $350 over the LME price, the strongest in more than a decade. The biggest supply squeeze is being seen in higher-cost aluminum alloys 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 anxiety has grown about shortfalls in the availability of high-purity aluminum used by the military. Aluminium Bahrain had already said 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.