Strait of Hormuz Closure Deepens Global Aluminum Supply Crunch

The Iran war has disrupted aluminum production in the Middle East, forcing force majeure declarations from major smelters and pushing LME prices to a four-year high of US$3,418/t, with Citi projecting a potential rise to US$4,000/t. Mexico's manufacturing exporters, particularly in automotive, aerospace, and packaging sectors, face rising input costs and supply uncertainty as the Strait of Hormuz closure compounds already depleted global inventories and US tariffs drive regional premiums to record highs. 

The Iran war has forced smelter closures and force majeure declarations across the Middle East's aluminum industry, threatening a supply crunch in a market where global stocks are near historic lows and LME prices have hit a four-year high of US$3,418/t,  with analysts at Citi warning of a potential rise to US$4,000/t if disruptions continue.

Several major producers have declared they can no longer fulfill contractual obligations. Aluminium Bahrain and Norsk Hydro, which co-operates the Qatalum smelter with Qatar Aluminum Manufacturing Company, have halted operations after QatarEnergy suspended gas supply to the plant. Norsk Hydro has indicated that returning to full capacity could take between six and 12 months.

The continued closure of the Strait of Hormuz, through which roughly 20% of the global oil supply flows, is compounding the disruption. Gulf producers are heavily reliant on uninterrupted shipping for both refined metal exports and raw material imports. The region hosts major smelting operations across Bahrain, Qatar and the UAE, collectively representing nearly 10% of global refined aluminum output and close to 23% of supply outside China,  a share that Europe and the United States depend on heavily as importers.

"The combination of Gulf smelter outages and shipping paralysis has created the most acute supply event since the Russia-Ukraine disruptions," said Neil Welsh, Head of Metals, Britannia Global Markets. "The key question now is whether the aluminium shock remains contained or becomes the catalyst for a broader re-pricing across the base metals complex."

"Our view is that the longer logistics, insurance, and port access remain impaired, the greater the chance that delays become real supply loss, even without further headline curtailments," said Ewa Manthey, Commodities Strategist, ING. Max Layton, Analyst, Citi, said instability in the production process leading to multi-month delays "introduces a prolonged supply risk," with LME prices potentially reaching US$4,000/t from US$3,322 currently.

The supply crisis is unfolding against a backdrop of depleted inventories. Combined LME registered and off-warrant aluminum stocks ended February at 583,000t, the lowest level since the exchange began publishing off-warrant inventory figures in 2020, down from a 3Mt stockpile at the start of the decade. Metal has been leaving LME warehouses in Malaysia's Port Klang at a rate of 2,000t/d since January. Stocks of aluminum in domestic US Comex warehouses are also near record lows.

The pool of usable metal is smaller than headline figures suggest. Russian aluminum accounted for 58% of warranted LME stocks at the end of January, and much of it is inaccessible to Western buyers. The United States and UK banned Russian metal imports in 2024 to prevent Moscow from funding its war in Ukraine, with the EU set to follow this year.

Structural changes in China's aluminum sector are adding further pressure. Chinese producers are running against a government-mandated annual capacity cap of just over 45Mt, with production growth slowing from 4% in 2024 to 2% last year, according to the International Aluminium Institute. Smelters were running at an annualized rate of 44.5Mt in December. 

China imported a record 2.5Mt of primary metal last year and exported nearly 10% less in semi-manufactured products year on year in 2025, equivalent to a Western market loss of approximately 600,000t. This dynamic, China absorbing more primary metal domestically while cutting finished product exports, is tightening Western supply from both ends of the chain simultaneously.

Outside China, production has flat-lined. Idle smelter capacity exists in both the United States and Europe, but restarts face competition from data centers and other sectors for scarce long-term power supplies. US import tariffs have driven regional premiums to record highs and raised concerns that Canadian producers may redirect supply to Europe. "With 50% tariffs already in place, any reduced supply from the Middle East will likely result in further inventory drawdowns, again increasing regional premiums and near-term volatility," said Natalie Scott-Gray, Analyst, StoneX.

Analysts had projected the aluminum market would be broadly balanced in 2026 before the US-Israeli campaign against Iran began. That assessment has since been overtaken by events.

Precious Metals Retreat as Iran War Gains Evaporate

The aluminum crisis is not the only commodity market feeling the pressure. Gold and silver have also surrendered gains made at the outbreak of the Iran conflict, with both metals contending with profit-taking after rallying to record highs.

Spot gold last traded at US$5,079.63/oz, down 1.78% on the session, while spot silver traded at US$83.75/oz, down 0.83%. Analysts at Heraeus noted that gold's safe-haven boost has evaporated, with profit-taking offsetting geopolitical demand as investors reassess the outlook. Treasury yields have risen only around 20 basis points since the conflict began, suggesting markets expect a short-lived war. The US dollar index moved from 97.6 to 99 following the start of hostilities, still below the 110 level reached in January 2025.

Dubai, a key gold trading hub that supplies refined metal to India, has been effectively cut off, with thousands of commercial passenger flights (the primary transport route for gold) cancelled since the conflict began.