Aluminum prices have far from finished rising; a real supply shortage will erupt in the next one or two months.

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The rise in aluminum prices may be far from over. The Middle East conflict and the blockade of the Strait of Hormuz have already accelerated the depletion of raw material buffer inventories at Middle Eastern smelters. Several industry analysts warn that the real supply shortage will become evident in the next one to two months, at which point the upward pressure on aluminum prices may far exceed current market expectations.

Since the outbreak of the conflict, the London Metal Exchange (LME) price of aluminum has risen by about 16%, closing at $3,655 per ton last Friday, near a four-year high. JP Morgan predicts that this year’s aluminum market will see the largest annual supply-demand gap since 2000, and forecasts that, regardless of whether the Strait of Hormuz reopens, aluminum prices are expected to rise to about $4,000 per ton in the coming months.

Wood Mackenzie analyst Charvi Trivedi said, "I am certain that most smelters’ inventories have now been depleted. The next one or two months are crucial for aluminum prices, because this is when the substantive supply shortage will truly break out." Alcoa CEO Bill Oplinger warned at an industry conference in Miami this month that a "real physical shortage of metal" may appear in Europe or North America in the next six months.

According to data from the International Aluminium Institute (IAI), Gulf region aluminum production in April fell sharply by 35% year-on-year, hitting the lowest point in over ten years. IAI Secretary General Jonathan Grant characterized the current situation as a “slow-motion supply chain shock” and warned that the above decline may not have bottomed yet.

Inventory Exhausted, Shortage Window Approaches

Aluminum is widely used in products such as Ford F-150 pickup trucks, beverage cans, etc., but since the conflict broke out, its price increase has lagged behind other commodities like crude oil, LNG, and fertilizers. One reason is that smelters previously stockpiled buffer inventories of raw materials sufficient to sustain operations for a few weeks, which somewhat eased market tensions. However, with the continued blockade of the Strait of Hormuz, these reserves are now close to depletion.

Charvi Trivedi explained that smelters are currently replenishing raw materials through land transport, but its capacity is far from sufficient to replace materials such as alumina that used to be imported through the strait. She estimates that Middle Eastern aluminum output loss this year will reach as much as 3.5 million tons, about half the region's recent annual output, and global supply is expected to shrink nearly 3% as a result.

Even if the strait reopens, it will take about six months for smelters to resume normal production, and repairing damaged facilities could take even longer. “It’s not as simple as plugging in a cord,” Trivedi said.

Production Cuts and the Market Supply-Demand Gap

Before the conflict, about 1 out of every 10 tons of aluminum in the world was produced in the Middle East, most of which was shipped to the United States, Europe, and Japan. The sharp drop in Gulf regional production in April directly compressed the global supply side’s buffer room.

Regarding the aluminum price increase being lower than some investors expected, Morgan Stanley provided an explanation: massive stockpiling before the conflict may have given buyers some buffer, and at the same time, regional premiums in the US, Europe, and Japan have risen sharply, absorbing part of the price pressure.

Nevertheless, Jefferies has recently received numerous calls and emails from investors asking how high aluminum prices can go. The bank’s analyst Chris LaFemina said:

"I tend to agree with the bullish view—if the Strait of Hormuz bottleneck cannot be resolved, prices must continue to rise for the market to rebalance."

Not everyone expects aluminum prices to soar again immediately. Fastmarkets analyst Andy Farida believes that given the substantial gains in aluminum prices, a period of consolidation is reasonable. Other market participants cite weak demand signals, high global inventories, and investors’ large net long positions as reasons to remain cautious.

Charvi Trivedi believes, the biggest downside risk to aluminum prices is a global recession. The International Monetary Fund (IMF) has warned that if the Strait of Hormuz blockade continues, the risk of a deep downturn in the world economy will increase. "Only in that situation can supply and demand meet again at some level," she said.

Risk Warning and DisclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the individual investment goals, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Invest accordingly at your own risk. ```