ROI-Iran war exposes fragility of Western aluminium market: Andy Home

By Andy Home

LONDON, March 6 (Reuters) - The Iran war is exposing a growing vulnerability in the West's supply of aluminium, a metal classified as a critical manufacturing input by both the United States and the European Union.

The London Metal Exchange (LME) aluminium price CMAL3 hit a four-year high of $3,418 per metric ton on Wednesday after one Gulf producer, the Qatalum joint venture between Norsk Hydro NHY.OL and Qatar Aluminum Manufacturing QAMC.QA, started powering down its smelter and another, Aluminium Bahrain ALBH.BH, declared force majeure.

The continued closure of the Strait of Hormuz risks further disruption to a regional production hub that accounts for 23% of non-Chinese supply.

Aluminium has historically been cushioned against such unforeseen supply hits by high inventory and excess smelter capacity in China, where producers would lift run-rates at the first sign of rising prices.

Inventory cover is now much reduced and China no longer has much spare capacity to flex, rendering the market much more sensitive to the sort of disruption currently unfolding in the Middle East.

DWINDLING STOCKS

The LME's daily stocks reports show that aluminium has been leaving LME warehouses in Malaysia's Port Klang at a daily rate of 2,000 tons since the start of January.

No one has paid much attention.

LME aluminium stocks lost much of their signalling power over the last 10 years as traders and banks tussled for metal to lock into lucrative warehouse deals.

The resulting churn, shifting metal in and out of the LME's warrant system, served to obscure any read-through to what was happening in the physical supply chain.

But the daily stocks noise has been masking a steady depletion of what was a 3-million-ton aluminium mountain at the start of the decade.

Combined registered and off-warrant stocks ended February at 583,000 tons, the lowest level since the LME started publishing off-warrant inventory figures in 2020.

Moreover, a significant amount of what remains is Russian aluminium, which accounted for 58% of warranted stocks at the end of January.

That's not a lot of use to many Western buyers. The U.S. and Britain banned the import of Russian metal in 2024 to prevent Moscow from funding its war in Ukraine, and the EU will follow suit this year.

The pool of usable metal in the LME system is therefore far smaller than even the falling headline figure suggests.

CHINA HITS THE BRAKES

The shift in stock dynamics is a reflection of profound structural changes in aluminium's supply landscape.

Chinese producers are now running up against the government's mandated annual capacity cap of just over 45 million tons.

Chinese production growth slowed from 4% in 2024 to 2% last year, with smelters running at an annualised rate of 44.5 million tons in December, according to the International Aluminium Institute (IAI).

The production slowdown is causing China's trade with the rest of the world to change.

Chinese manufacturers have been importing more primary metal, particularly from Russia. The world's largest producer imported a record 2.5 million tons last year together with just over 1 million tons of unwrought alloy, according to the World Bureau of Metal Statistics, which sources data from official customs figures.

And China has been exporting less semi-manufactured products such as tube, sheet and foil. Outbound shipments fell by almost 10% year-on-year in 2025, equivalent to a Western market loss of almost 600,000 tons.

In other words, China is importing more aluminium metal and exporting fewer finished products, tightening Western supply at both ends of the chain.

FLAT-LINING

Western smelters have even less capacity flex than their Chinese peers.

Production outside of China did no more than flat-line last year, according to the IAI.

Here the core problem is the price of energy, a crucial cost component in the electrolytic smelting process.

There is significant idle smelter capacity in both the U.S. and Europe but restarts need to compete with other sectors, particularly data centres, for scarce long-term power supplies.

Indeed, high power prices continue to take their toll on existing plants. South32 S32.AX is currently in the process of placing its Mozambique smelter on care and maintenance after failing to negotiate an economically viable power contract.

While Gulf producers are currently in the firing line, the evolving energy shock from the Iran war risks further undermining the West's ability to build longer-term supply resilience.

NEW VOLATILITY

Aluminium is a ubiquitous feature of modern life, used in everything from homes to cars to food packaging.

It is also key to the energy transition.

Back in 2020 the World Bank identified aluminium as a "high-impact" and "cross-cutting" metal in all existing and potential green energy technologies.

However, it is a metal facing ever more price volatility as the global market emerges from a prolonged period of surplus to one where supply looks a lot more problematic and stocks are much lower.

The Iran war is a wake-up call for a very important metal.

(Andy Home is a Reuters columnist. The opinions expressed are his own)

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