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Andy Home: The crisis of aluminum in the ROI: War, tariffs, and a market that is running out of products.

The Iran War is triggering a global crisis on the?aluminium markets, with potentially devastating effects in sectors such as construction, packaging and transport.

Even if war ended tomorrow, it would take Emirates Global Aluminium up to one year to recover from damage caused by a missile attack?on the Al Taweelah Smelter last month.

Aluminium Bahrain, which is the largest single-site production facility outside of China, was also hit. However, the extent of the damage is not known at this time. Alba and Qatar Aluminium had both reduced production prior to the attack due to power shortages.

The Strait of Hormuz is severely restricted, and the production loss could increase as smelters exhaust their raw material stocks.

According to Wood Mackenzie, the global market could face a deficit of up 4 million metric tonnes this year.

Western buyers will be the ones to bear the brunt of this massive supply cut and policymakers may have to make some tough choices in the coming weeks if they wish cushion the impact.

THINK INVENTORY COVER

In the past, markets could have turned to "the London Metal Exchange" (LME) if they needed extra metal. In the early part of last decade, the registered inventory was over 5 million tons.

LME stock has since decreased to less than 400,000 tons, with another 100,000 tonnes sitting in the "off-warrant" category.

CME warehouses were also raided. The total deliverable stock has fallen by 70% since January and now only amounts to 1,864 tonnes.

These figures are misleading. Russian metal, that many Western users cannot use because of sanctions imposed following the invasion of Ukraine is accounted for by 270,000 tons in the LME's registered inventory at the end March.

The non-Russian component has been the subject of a dispute between traders. In the first week in March, someone cancelled 98,000 tonnes of Indian aluminium registered on the LME. However, last week time spreads were so high that they had to re-warrant a large portion of it.

The benchmark spread between three-month cash and the benchmark cash The market tightened to $95.50 per tonne, the highest since 2007.

Power Constraints

The idle smelter capacities, especially in the U.S., and Europe, could theoretically be reactivated to help relieve the pressure on metal supplies.

During previous energy crises, however, the majority of this capacity has been taken offline. Electrolysis is used to produce metal in smelters. A typical smelter can consume as much energy as a city of the size Boston.

It seems unlikely that much of the capacity mothballed will be restored, given the impact the Iran War has had on energy prices.

Even before hostilities began in the Gulf, a global shortage of affordable energy was forcing many more closures.

In March, the Mozal Aluminium Smelter, which is owned and operated in majority by South32 Australia, was put on care and Maintenance after it failed to secure a commercially viable power supply contract.

Wood Mackenzie says that even if you allow for increased recycled production, and the softer demand caused by the energy impact on manufacturing activities, there is still a significant deficit in the global aluminum market over the next year.

UNPALATABLE CHOICES

The West will be most affected by this deficit, forcing governments to make unpalatable decisions.

Two countries can help reduce the shortfall.

China is the largest producer of aluminium in the world. China is a major producer of semi-manufactured metals such as wire, rod and?plate.

The rest of world has spent the past decade building trade barriers to stop the Chinese exports, accusing Beijing that it is undermining its competitors.

Western aluminum users do not need more Chinese products at low prices. They require primary metals and alloys.

The only remaining country is Russia, which is the producer of both primary metals and the variety of alloys with added value produced in the Gulf.

After the 2022 invasion, Japanese manufacturers have already started to show signs of returning to Russian supplies.

U.S. buyers and European buyers will need to follow suit.

President Donald Trump has increased import tariffs on aluminium to 50%, which is a further aggravating factor in the United States.

The cost of imported ingot has risen to more than $2,500 per tonne above the LME price. This is a four-year high of $3,580 a tonne.

This is a cost-price equation for the time being. The longer the Gulf disruption continues, the quicker stocks will deplete.

It may eventually stop being a matter of price and become more of a concern of having enough metal for manufacturing orders.

Andy Home is a columnist at. This column is great! Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.

(source: Reuters)