JPMorgan ChaseWarning that the global aluminum market has entered what it calls a supply "black hole" that even an immediate end to the conflict in the Middle East will not be able to prevent the deep and persistent supply shortage.
JPMorgan issued a warning to customers this week,The aluminum market is experiencing the biggest supply gap in more than 25 years, and it is forecast that aluminum prices could break above $4,000 per tonne.It comes after Iran's direct strikes on two key smelters in Abu Dhabi and Bahrain caused irreversible capacity losses and pushed aluminum prices in London soaring above $3,600 a tonne, a four-year high.
The supply shock has hit Western manufacturers particularly hard. China and Russia, as major alternative sources of supply, have been effectively excluded from the U.S. and European markets due to sanctions and trade tariffs, and the shortage faced by some downstream buyers may even be unsolved.
Supply 'Black Hole' Comes True, JPMorgan Warnings Are Reality
JPMorgan Chase has previously continuously warned that the aluminum industry is heading towards a "metaphorical point of no return"-even if logistics in the Strait of Hormuz resumes smoothness, the global aluminum market will face serious and lasting supply disruptions. This week, the bank formally informed customers that the market has entered this "black hole".Since the outbreak of the conflict in the Middle East, the aluminum industry has warned that smelters in the Middle East will be forced to cut production if the flow of raw materials into the region through the Strait of Hormuz is blocked for more than several weeks. Some production cuts have already occurred, and Iran's direct strike on two key smelters in Abu Dhabi and Bahrain at the end of last month has dramatically expanded supply losses and caused a lasting lack of capacity.
JPMorgan Chase predicts that aluminum prices are on track to break above $4,000 per tonne. Aluminium's all-time high of $4,073.50 per tonne was set in 2022 – when the war in Ukraine triggered an equally profound supply shock.
It is difficult to reverse the shutdown of smelters, and the resumption cycle is at least one year
The severity of this round of crisis partly stems from the structural characteristics of aluminum smelting industry. The supply of aluminum ore is abundant, and the construction cost of smelters is relatively low. However, once production is stopped, the restart cost is extremely high and the technical difficulty is quite high.For this reason, even in the face of rising prices and expectations of easing conflict, it will take at least a year, and perhaps longer, for the Middle East to fully recover aluminum supply. This characteristic has historically led to another distortion: even when prices are low, smelters are reluctant to cut production, thus exacerbating the imbalance between supply and demand; Once production is stopped, production capacity is often permanently lost.
Analysts have previously questioned whether short-term supply disruptions triggered by the Hormuz lockdown will be offset by a slump in demand as the war drags down the global economy. But Iran's direct strike on the smelter has completely changed the logic of this judgment.
Western Manufacturers Bear the Brunt of Alternative Sources Limited
This supply shock has been particularly prominent for Western manufacturers. Although China and Russia are the world's major suppliers of aluminum, both countries have been effectively isolated from the U.S. and European markets due to sanctions and trade tariffs.Plants are paying higher prices to find alternative sources, but for some of the downstream products that Middle East smelters are focused on, the supply gap may simply not be filled. This means that the impact of this supply crisis will not only stay at the price level, but also directly impact the production chain of Western manufacturing industries.
The aluminum market had been mired in oversupply for a long time, but now it took a sharp turn in just a few weeks, entering what JPMorgan Chase described as a "black hole" state. For investors, the $4,000 price target is no longer an unreachable prediction, but a fast-approaching reality.
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