Aluminium prices return to February levels as supply-chain pressures persist

London Metal Exchange (LME) three-month aluminium prices have returned to just above USD 3,000 per tonne, close to their levels in early February, before US and Israeli military operations against Iran began. However, the apparent stability in prices masks continuing pressure across the physical aluminium supply chain, following Iranian missile attacks on Gulf smelters and disruptions to shipping through the Strait of Hormuz.

Almost 3 million tonnes of aluminium production capacity has been knocked out by the disruptions. Eight months later, the market appears relatively unconcerned, with traders relying on rising output from Indonesia and increased Chinese exports of aluminium products to compensate for the shortfall until Gulf smelters recover and shipping through the Strait of Hormuz returns to normal.

Despite these alternative supplies, the market has yet to fully overcome the effects of the disruption, with physical premiums remaining elevated and exchange inventories falling to multi-year lows.

Gulf aluminium output remains below pre-disruption levels

According to the International Aluminium Institute, primary aluminium production in the Gulf fell by an annualised 2.8 million tonnes between February and May. The decline reflected the forced shutdown of Emirates Global Aluminium's Al-Taweelah smelter, damage to Aluminium Bahrain's (ALBH.BH) facility and logistical difficulties affecting other regional producers.

Production has gradually recovered as the affected facilities undergo repairs and resume operations. However, the August production run-rate stood at an annualised 3.5 million tonnes, still 2.6 million tonnes below pre-disruption levels.

The shortfall has increased the importance of alternative supply sources, particularly China and Indonesia, whose growing exports are helping maintain metal availability in international markets.

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China and Indonesia help maintain aluminium availability

China's primary aluminium exports remain restricted by a substantial 30 per cent export duty. Nevertheless, shipments of aluminium alloy have increased considerably, doubling year on year to 349,000 tonnes between January and August.

Exports of semi-finished aluminium products, including plate, sheet and strip, also rose significantly. Volumes increased by 774,000 tonnes to 4.46 million tonnes over the same period, providing another channel through which Chinese material is reaching overseas markets.

Indonesia has also emerged as an increasingly important supplier as its new Chinese-owned smelters accelerate production. The country exported 114,000 tonnes of primary aluminium in July, setting a new monthly record.

Although China received around half of Indonesia's aluminium exports last year, shipments since the Iranian conflict began have spread across a wider range of destinations in Asia, Europe and even the United States.

These additional supplies have helped ease some regional availability concerns. However, their impact has not been sufficient to return physical aluminium premiums to their levels before the disruption.

Physical premiums ease, but regional differences persist

Improved aluminium availability in Asia has brought physical premiums down from their June peaks. Japanese buyers have negotiated a fourth-quarter delivery premium of USD 255 per tonne above the LME cash price, a 35 per cent decline from the previous quarter.

Even so, the premium remains above the US$200 per tonne level recorded at the beginning of the Iranian conflict, indicating that physical supply conditions have not fully normalised, even in a comparatively well-supplied market.

The pressure is more pronounced in Europe, where buyers are paying a CME European duty-paid premium of USD 559 per tonne above LME cash. This is twice the level recorded at the end of February.

The United States continues to face the highest premium among the markets discussed, with the US Midwest premium standing at an elevated USD 2,312 per tonne above LME cash. The premium reflects not only physical market conditions but also President Donald Trump's 50 per cent import tariffs on aluminium.

The divergence between regional premiums highlights how the effects of disrupted production and trade are being felt unevenly across global markets.

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LME inventories fall to multi-year lows

High physical premiums are drawing available aluminium into the physical supply chain, leaving less metal in exchange warehouses. Registered LME inventories have fallen to 238,625 tonnes, their lowest level this century.

The composition of these stocks presents an additional challenge for Western buyers, as most of the remaining registered inventory consists of Russian metal, reducing its appeal to many of them.

Off-warrant LME inventories have also declined steadily since February. They now total 73,509 tonnes, the lowest level since the exchange introduced this category of stock reporting in 2020.

The limited availability of exchange stocks underscores the difference between relatively stable benchmark prices and the conditions faced by buyers seeking physical aluminium. Although alternative production and exports have helped meet demand, readily available inventories remain constrained.

Aluminium time-spreads point to continuing tightness

Conditions in the LME futures market have eased considerably since June, when the premium for cash aluminium over three-month metal rose above USD100 per tonne.

However, the latest movement in time-spreads suggests that near-term supply remains tight. After a period of mild contango, the market has returned to a small cash premium over three-month aluminium, indicating renewed pressure on immediate availability.

This relationship between cash and three-month prices is likely to remain an important feature of the London market while physical premiums stay elevated.

The aluminium market has absorbed a substantial loss of production capacity without a sustained return to the higher benchmark prices seen during the initial disruption. Rising Indonesian output and increased Chinese exports have helped bridge the supply gap, while repairs at Gulf smelters offer a route towards recovery.

Nevertheless, low LME inventories, elevated regional premiums and renewed tightness in near-term contracts show that the apparent calm in benchmark prices does not yet reflect a fully normalised physical market.