The blockade of the Houmauz did not ignite the $4000 aluminum price: dark flights, China and Indonesia supply wave reshaping the logic of AI metal pricing.

The Iran war has brought one of the biggest supply shocks ever to the global aluminum market, but the uncontrolled price surges that many were prepared for have been weakened by the adaptability of producers from the Middle East to China. When the new round of geopolitical conflicts in the Middle East began, market observers warned that unless the Strait of Hormuz quickly reopened, Middle East smelters accounting for about 10% of global aluminum output could run out of raw materials related to aluminum production in a matter of weeks and be forced to shut down on a large scale, potentially plunging the global aluminum supply market into a crisis and possibly pushing LME aluminum prices to historic highs of over $4,000 per ton. As the concerns escalated sharply when Iran targeted and launched limited missile attacks on the region's smelters, it was widely believed in the market that, besides oil and gas, aluminum seemed to be one of the bulk commodity markets most seriously affected by supply shocks. However, the supply shock has actually been weakened by clandestine shipments and the substantial supply from China and Indonesia. In recent weeks, Middle East smelters have implemented a series of complex logistics and operational processes - including bold voyages through the strait - to replenish stocks of alumina and other raw materials, helping prevent a large-scale shutdown of production capacity in a region accounting for 10% of global supply. Outside the Gulf region, Chinese and Indonesian smelters have played a key role in maintaining stability in the global market as buyers wait for exports to resume. Now, as analysts, traders, and investors actively speculate on the next price movements, there are clear differences emerging on how quickly the market will recover from supply shortages. Critical AI data center power metals face supply and demand stress tests "Due to diversion of Middle East alumina imports, rising exports from China, and increased production in Indonesia, a comprehensive physical aluminum supply freeze has been avoided," said Amelia Xiao Fu, head of commodity strategy at Bank of China International. "The market has survived the past few months by consuming stocks, but these operational buffers are now being weakened." As shown in the chart above, aluminum prices peaked due to the Iran war-induced surge, but have cooled as the supply side continues to respond to the gap - many analysts in the industry had previously predicted that aluminum prices would rise to $4,000 per ton after the Gulf smelters were attacked. Middle East smelters have been forced to significantly reduce production, but the exact scale of the losses due to their efforts to consolidate the supply chain is difficult to quantify. Furthermore, production restrictions in China and power limitations in Indonesia will only add to the difficulty of assessing how quickly supply and demand will rebalance. Some of the most bullish market players have recently lowered their aluminum price forecasts. JPMorgan Chase, for example, stated that the time to reach $4,000 per ton would be longer than expected, due to strong Asian supply responses and significant consumption of industry non-visible stocks during the Strait of Hormuz blockade. On the other hand, the commodity analyst team at Goldman Sachs believes that aluminum prices will move towards $3,000 per ton in the next year; even though the bank has revised its initial predictions made at the start of the war to reflect a slower than expected rebound in Middle East supply. As of early Asian trading on Monday, London Metal Exchange aluminum futures prices (i.e. LME aluminum prices) were stable at $3,396 per ton. There is even more disagreement among Wall Street analysts about the balance of aluminum supply and demand. Citigroup expects the biggest supply shock in over 50 years, while Bank of America predicts that supply and demand will broadly balance in this 76 million ton market. The closure of the Strait of Hormuz, disruption of shipping, attacks on smelters, and force majeure declarations have immediately amplified concerns in the market about a "break in spot supply". However, some analysts believe that even if the closure of the Strait of Hormuz leads to a disruption of Middle East supply, it does not necessarily mean a severe blow to global aluminum supply. As shown in the chart above, analysts have different views on the scale of aluminum shortages - Citigroup, which is the most bullish on aluminum prices, claims the market is facing a historic supply gap, while Bank of America believes it is only a minor shortage. Note: Wood Mackenzie estimate is in the range of 2.5 to 3 million tons. Aluminum, a lightweight industrial metal, has long been seen as a substitute for copper, especially in cost-sensitive, weight-sensitive, and relatively loose electrical conductivity applications. This substitution trend has been ongoing for over a decade, accelerating in recent years due to resource security and the promotion of new energy industries. However, in high reliability, high power applications, copper remains irreplaceable. The importance of aluminum as a key industrial metal lies in its combination of lightweight, corrosion resistance, processability, conductivity, and thermal conductivity, making it widely used in transportation, construction, power transmission and distribution, packaging, machinery manufacturing, and new energy equipment. The International Aluminium Institute expects global aluminum demand to grow by about 40% by 2030 compared to post-pandemic levels, and points out that aluminum's conductivity makes it crucial for infrastructure like electric vehicles and charging stations. In the rapidly advancing global AI data center construction sector, the value of aluminum is mainly reflected in three chains: power infrastructure in distribution and transmission, busbars/cables, and structural components; lightweight thermal materials in servers, switches, power supplies, cabinets, heat sinks, cold plates, and heat exchange components, where aluminum is used for electronic heat dissipation due to its high thermal conductivity, light weight, and low cost; and as AI loads increase the power density of cabinets, liquid cooling and direct-to-chip cooling become critical, increasing the importance of heat management materials. Aluminum is not the most "visible" asset in the AI computing chain, but it is an essential base metal for the power, heat dissipation, structure, and industrial manufacturing foundation behind AI factories. Hormuz did not ignite $4,000 aluminum prices - war shock did not lead to "complete supply disruption", aluminum industry chain witnessed "wartime logistics self-rescue" Part of the disagreement stems from the expectation that the material shortages have caused deeper supply losses for Persian Gulf smelters than they publicly disclosed. However, according to Ben Ayre, an analyst at the vessel tracking company Kpler, the increasing amount of alumina entering the region indicates that even with the closure of the Strait of Hormuz, smelters have made progress in stock replenishment through clandestine shipments. According to Kpler's analysis, in recent weeks, a few ships have shown a willingness to transport alumina directly through the strait, turning off tracking systems and engaging in so-called "clandestine" voyages; in this crisis, it is these clandestine voyages that have allowed small amounts of oil to continue flowing to the global market. After redirecting more alumina imports, the material is unloaded at Omani ports and transported to smelters by trucks, posing a significant logistical challenge to the region's logistics capacity. Data from the company shows that thanks to these recent efforts in clandestine voyages, the influx of this raw material into the Gulf in May has returned to pre-war levels. "This has spawned some very novel solutions, and we've had to work very hard to keep pace," Ayre said in an interview. "It's not unique, but in terms of reflecting the value system that keeps these businesses running, it's certainly unusual." Assessing the scale of the supply stress presents challenges not only in the Gulf region. According to Wall Street behemoth JPMorgan Chase, the impact of a global surge of aluminum supply in the first half of the year has been weakened by substantial depletion of private held stocks, which are notoriously difficult to monitor. "When we talk to customers, you can clearly feel that the market is tight, but the first buffer is these unseen stocks," said Greg Shearer, head of base metals and precious metals research at the bank. However, he believes that the depletion of these reserves is only a matter of time, and exchange inventories will also start to be consumed, driving prices higher. "It's taking longer than expected, but there's still a significant gap to fill." As shown in the chart above, private aluminum metal stocks in some markets appear to have declined significantly - industry estimates show a sharp drop in aluminum stocks in Japan. China and Indonesia unleash a supply wave, shifting aluminum metal trading from war premiums to supply-demand rebalancing The actions of Chinese smelters have added another analytical challenge. Prior to the outbreak of the conflict, the aluminum industry was filled with bullish sentiment as Chinese smelters began to approach the production cap that seemed to signal the end of a long period of oversupply. However, since the start of the Iran war at the end of February, official statistics indicate that Chinese smelters' production has significantly exceeded the cap of 45 million tons, with April data pointing to an annualized operating rate of 47 million tons. With exports surging, some analysts are betting that if Chinese and Indonesian large smelters continue to operate overloaded, they may single-handedly solve any level of global shortage. When assessing whether they will do so, analysts need to accurately judge how forcefully China will enforce the cap and to what extent engineers can deliver power to factories beyond their designed capacity. An industry veteran compared this process to trying to balance a large elephant on a single finger. As shown in the chart above, as Chinese smelters reach the limit, their production is under scrutiny from global investors, and any further increase in production in China could potentially ease the impact of shortages in other regions. The last variable is the impending wave of large-scale new aluminum metal supply from Indonesia. The surge in Indonesian aluminum exports has increased industry focus on its emerging role as a major global supplier; at the same time, there is a growing expectation in the market that local producers will shift scarce power from low-profit nickel operations to aluminum smelters. "We've always known there would be increased capacity, but the current view is that production will lag behind due to the lack of available power," said Amy Gower, head of metal and mining strategy at Morgan Stanley. "We haven't adjusted the model yet, but the risk now is that with power shifting from nickel to aluminum, new supply could come faster." As shown in the chart above, the aluminum industry is booming in Indonesia - Indonesian aluminum exports are expected to continue to surge this year. Overall, the "perfect supply storm" combination of the rebound in Middle East supply under clandestine shipments, high production in China, and the imminent surge in output from Indonesia is forming a consensus in the industry that prices will decline in the long term. However, as the US and Iran negotiate an end to this round of Middle East war, the market is still fiercely debating: before a large influx of new raw materials and a return of a large supply of aluminum metal, as stocks are depleted, will the market go through a final squeeze. "I think if that's going to happen, it should have happened by now," said Helen Amos, head of commodity research at BMO Capital Markets. "The aluminum supply-demand market has likely already passed the peak of the most severe supply-demand gap."