‘Calm has returned’ to Gulf aluminium with Hormuz reroute

GCC smelters can reroute 70 to 80 percent of aluminium output around the Strait of Hormuz, helping to calm a market shaken by the Iran war, according to a sector expert at Julius Baer.

The Gulf produces more than 8 percent of the world’s primary aluminium and early disruption to production in Bahrain and Qatar initially rattled prices.

But Carsten Menke, head of next generation research at the Swiss private bank, said alternative trucking routes via Oman, Saudi Arabia and the UAE port of Fujairah will allow much of the region’s exports and raw material imports to keep moving.

AGBI‘s John Crowley spoke to Menke about what the disruption means for the sector.

AGBI: If 70 to 80 percent of output can be rerouted, what is happening to the remaining 20 to 30 percent?

Carsten Menke: This is production which is already curtailed in Bahrain and partly in Qatar, as announced by smelters Alba and Qatalum during the first week of the war. It furthermore includes the remaining Qatari production, as thus far they appear to have been unable to organise an alternative route.

AGBI: How much additional cost and delay does rerouting via Oman, Saudi Arabia or Fujairah add per tonne?

Carsten Menke: This is very difficult to estimate. Roughly speaking, the delay should be between a few days to a week, depending on how long the route is. The additional cost, which is primarily a function of the truck rental, could be $75 to $125 per tonne, again depending on the length of the route.

AGBI: How long can Gulf smelters keep running if inbound raw materials are disrupted?

CM: They are now also sourcing their raw materials via truck from the other Gulf ports. The risk of raw materials disruption is thus reduced.

AGBI: Which inputs are most at risk right now – alumina, petroleum coke, caustic soda – and which are hardest to replace?

Julius Baer/Supplied

CM: They are all affected and they are all equally important. Aluminium smelting is quite a complex process, requiring all of them in the right proportions.

AGBI: Why hasn’t aluminium rallied more sharply if an important producing region is under pressure?

CM: The market rallied on the initial news of production curtailments in Bahrain and Qatar, which for most market participants came earlier than expected. The market then feared further announcements and a bigger short-term supply shock. As the producers have now secured alternative outlets, calm has returned to the market and prices have receded. Risks remain, such as damage to the smelters or to critical infrastructure.

AGBI: What would turn this from a manageable logistics issue into a genuine global supply shock?

CM: For a global supply shock to materialise, a larger share of Middle Eastern production (more than 50 percent) would need to be unavailable. Aluminium is generally not a supply-constrained market and other suppliers should be able to partly offset what is currently being lost. Also, demand is likely to be somewhat softer as well.

Further reading:

• Gulf aluminium producers feel the heat from Iran war
• Qatari LNG shutdown puts 11% of global helium supply at risk
• Sulphur faces demand destruction as war disrupts supply