The situation in the Middle East and the resulting maritime "bottleneck" are causing a historic crisis in the aluminum market, which could have a significant impact on various industries that rely on this basic metal.

Aluminum is the third most widely used metal in the world, valued for its high strength-to-weight ratio, corrosion resistance, and excellent electrical conductivity — properties that make it indispensable in everything from beverage cans and cooking foil to aerospace components and the power grid. Major end uses of aluminum include packaging, transportation, defense, construction, electronics, solar, and transmission. Aluminum is also used in cookware, outdoor furniture, bicycle frames, and sports goods.

For the past 20 years, the aluminum market has been in a structural state of oversupply, with inventories remaining high. However, with the outbreak of the US-Iran conflict and the substantive blockade of the Strait of Hormuz, everything has changed.

Two aluminum smelters in the Middle East were damaged in a missile attack, causing the UAE-based EGA's Al Tawila plant and Bahrain Aluminum to reduce production or shut down. Data from the International Aluminum Association (IAI) shows that aluminum production in the Middle East fell to its lowest level in over a decade in April. The aluminum price surged to its highest level since the outbreak of the Russo-Ukrainian conflict in February 2022, due to the conflict between the US, Israel, and Iran.

Another manifestation of the aluminum supply shock is reflected in the over-the-counter trading of the market, such as aluminum blooms—solid metal bars that are semi-finished and used in the transportation and construction industries. Production losses in the Middle East were exacerbated by the shutdown of Mozal, an aluminum smelter in Mozambique, due to high energy prices.

According to the International Aluminum Association data, the two shocks have led to a 2.4 million-ton reduction in aluminum production in western countries over the past two months. And the situation could get worse, depending on whether the aluminum smelters in the Persian Gulf that are still operating can get enough raw materials through routes that bypass the Strait of Hormuz.

Global aluminum markets are being warned by Mercuria, a commodities consulting firm, that "the magnitude of the supply shock we are currently seeing in the aluminum market may be the largest single supply shock that the base metal markets have experienced since 2000."

Mercuria expects that the aluminum market could face a shortage of at least 2 million tons by the end of this year, and the situation could be even more serious if the US-Iran conflict continues.

JPMorgan analysts warn that the aluminum market is heading for a no-way-out situation, with the global aluminum market facing serious and persistent supply disruptions, even if shipping through the Strait of Hormuz recovers in the short term, it may be difficult for the supply disruption situation to improve.

The situation in the Middle East is causing a severe supply shortage and driving up costs for US aluminum producers. The Middle East supplies about one-fifth of the aluminum used in the US, according to Latitude Media. Supply chain disruptions could have a complex impact on multiple industries, with the energy sector particularly hard hit—aluminum is widely used in overhead power lines, solar panel frames, wind turbine structures, and in utility-grade and electric vehicle batteries.

The problem facing US buyers of aluminum products stems from the 50 percent duty imposed by the US government on imported aluminum products and derivatives into the United States. The duty is primarily aimed at Canada, which accounts for 60 percent of total US aluminum imports.

But the tariff has pushed up the regional premium - the extra fee paid on top of the LME benchmark price. Latitude Media explained that, despite the increased costs, domestic prices in the US would still need to be raised to incentivize foreign suppliers to continue shipping aluminum to the country.

Meanwhile, as Canada diversifies its markets beyond the US, US imports of aluminum have begun to decline. Without a stable supply from the Middle East, however, that gap will be difficult to fill, Latitude Media notes. Short-term solutions are either unworkable or difficult to implement, leading to a rush among aluminum buyers and a likely need to pay more.

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