Global: Middle East conflict exposes aluminium market fragility as supply risks intensify

• Gulf accounts for nearly 8% of global output, exports 75% of production
  
  
• LME hits January high; backwardation signals immediate tightness
  
  
• India's scrap-reliant secondary sector vulnerable to freight shock
  
  

Escalating military strikes between the US, Israel and Iran have injected fresh volatility into aluminium markets, pushing prices to their highest levels since January and exposing structural supply risks centred on the Gulf.

On the London Metal Exchange, three-month aluminium rose above $3,200/t, with the prompt spread moving into backwardation -- a classic signal of tightening nearby availability. Options positioning and broader flows into hard assets suggest speculative participation is amplifying the move, but the underlying driver remains physical risk.

Gulfs structural importance magnifies disruption risk

The Middle East produces roughly 6.85 mnt of primary aluminium annually, close to 8% of global output and exports nearly three-quarters of that volume. With China producing 44.2 mnt and operating near its 45.5 mnt capacity ceiling, incremental global supply flexibility is limited. Aluminium is also the only base metal where combined LME and COMEX inventories sit below the five-year seasonal average, reinforcing fragility in the physical market.

A closure or restriction of the Strait of Hormuz would materially disrupt flows, particularly to Europe, which relies on the Gulf for nearly 20% of its aluminium imports (around 1.2 mnt in 2023), especially after reducing Russian intake. Japan and South Korea would also face tighter premiums. The US, already operating under 50% tariffs on aluminium imports, could see sharper regional premium spikes and accelerated inventory drawdowns.

China remains relatively insulated in the near term due to record Russian inflows in 2025, though global price strength would still transmit via arbitrage channels.

India's scrap dependence creates secondary risk

India is particularly exposed through scrap trade. The country imported 1.92 mnt of aluminium scrap in 2025, of which approximately 0.47 mnt -- nearly 25% -- originated from the UAE and Saudi Arabia. Secondary smelters, die-casters and alloy producers depend heavily on these inflows.

While domestic aluminium prices have increased INR 4,000-6,000/t, real trade remains thin. Buyers are refraining from aggressive bookings as logistics uncertainty outweighs benchmark strength.

War-risk insurance premiums are reportedly rising 100-200%, emergency war service charges of $2,000-3,000 per container have emerged, and freight for 40-ft containers stands at $2,450-2,460, with projections above $3,000 if disruptions persist. Some vessels remain idle despite loaded cargo, while rerouting could extend transit times and tighten near-term scrap availability.

Market participants note that scrap inflows were already moderating prior to the escalation, suggesting the conflict could accelerate supply compression across India's secondary chain.

Producer vulnerability and raw material constraints

Regional producers such as Emirates Global Aluminium and Aluminium Bahrain face port-related exposure. Smelters rely heavily on imported bauxite and alumina from Australia, Guinea and Brazil. Although most maintain one to two months of inventory, prolonged shipping disruption could pressure operating rates. In Iran, around 10-15% of 0.8 mnt annual capacity has reportedly been idled as a precaution.

Additionally, Rio Tinto paused negotiations with Japanese customers over second quarter aluminum supply premiums, citing the strikes involving Iran. The company had initially offered supply at a premium of $250/t over LME prices before withdrawing the proposal. The offer was among the highest seen in more than a decade.

Outlook hinges on shipping clarity

The aluminium market is now pricing geopolitical risk atop already tight fundamentals -- China's capacity ceiling, below-average inventories, rising energy costs and higher freight. While speculative flows may extend the rally, sustained upside will depend on the duration of shipping and insurance disruption.

For India, the near term outlook depends largely on how quickly shipping, insurance and port operations normalize. While prices may firm if supply lines remain strained, meaningful trade activity is unlikely to resume until there is greater clarity on vessel movements and transit timelines.