Aluminum Drops as Gulf Supply Shock Premium Fades

Key Moments

Market Shrugs Off Escalating Conflict

The intensifying conflict involving Iran has not been reflected in aluminum prices. Despite significant damage to production and logistics across key Gulf producers, London Metal Exchange (LME) three-month aluminum has fallen back to roughly $3,170 per tonne. That level matches prices seen before the United States launched its “Operation Epic Fury” joint strikes with Israel on Iran on Feb. 28, even though the contract had previously spiked to a four-year high of US$3,787.50 per tonne in early June.

This retreat raises questions about what happened to the earlier war-related risk premium and whether the market is underestimating the scale and duration of the shock to a metal regarded by both Washington and Brussels as strategically important.

Gulf Output Hit Hard, Recovery Still Uncertain

Physical disruptions in the Gulf have been substantial. Damage to two major smelters, alongside logistical constraints at others, has effectively created a 2-million-metric-ton gap in the global supply chain on an annualized basis. According to the International Aluminium Institute, production in the Gulf region dropped by 20 percent in the first half of this year, with smelter operating rates down by more than 2 million tonnes annualized since hostilities began.

The market has taken some comfort from repair and restart progress at Emirates Global Aluminium’s Al Taweelah facility after it was struck by an Iranian missile. The alumina refinery is expected to return to production this quarter, and as of July 2 the company had brought back online the first 89 of 1,262 cells at the smelter.

Elsewhere in the region, visibility is poorer. The operational status of Aluminium Bahrain, which was also hit by Iranian strikes, remains unclear. Qatar Aluminium continues to run at only 60 percent of capacity. Even in a benign geopolitical scenario, a full restoration of Gulf output could take many months, and the broader backdrop is anything but benign as the United States resumes bombing in Iran, Tehran tightens its control over the Strait of Hormuz, and Iranian-aligned Houthis move to enforce their own blockade in the Red Sea.

China’s Role: High Utilization and Rising Exports

The recent easing in LME prices is rooted in growing confidence that lost Gulf supply can be mitigated, at least in part, by higher shipments from China and Indonesia. Chinese smelters are currently benefiting from healthy profit margins, supported by low alumina costs and elevated metal prices. Consultancy AZ Global estimates Chinese aluminum capacity utilization near 99 percent.

Exports of Chinese semi-manufactured aluminum products have accelerated. According to the World Bureau of Metal Statistics (WBMS), which compiles official customs data, exports of items such as bars, rods, and tubes increased by 10 percent year-on-year in the first five months of 2026. May shipments of 595,000 tonnes marked the highest monthly total since November 2024.

These products are not a direct substitute for the primary and alloy metal lost from the Gulf, but they can indirectly help re-equilibrate the market by dampening Western demand for primary metal. However, this shift intensifies competition with existing semi-fabrication capacity in Western markets, which has already led to a string of trade defense actions targeting Chinese material.

Indonesia Emerges as a New Primary Metal Force

Indonesia is rapidly establishing itself as a major supplier of primary aluminum, underpinned by a wave of Chinese-backed investment in new smelting capacity. The 480,000-ton-per-year Hua Chin smelter – a joint venture between Tsingshan Holding Group and Huafon Group – ramped up last year and in May applied to register its “HCAI” brand with the LME.

Another entrant, Alamtri Resources Indonesia, is commissioning a similarly sized facility and recorded its first export shipments in June. The expansion is far from over. The project pipeline could reach as many as 11 new smelters with a combined annual capacity of 13 million tonnes, according to Greg Wittbecker, president of Wittsend Commodity Advisors.

Indonesia’s external sales are rising quickly. WBMS data show exports of primary metal climbing from 155,000 tonnes in 2024 to 511,000 tonnes in 2025, followed by a further 58 percent year-on-year increase in the first five months of this year.

Trade Flows, Carbon Rules, and Inventory Cushion

The pattern of Indonesia’s trade flows helps explain why the wider aluminum market appears comfortable with Gulf disruptions, but it also underscores potential vulnerabilities. Last year, around 40 percent of Indonesia’s primary exports went to China, with South Korea and Vietnam accounting for 16 percent and 12 percent, respectively.

There were also notable volumes into Europe, especially in the fourth quarter. Indonesian producers shipped 15,000 tonnes to Spain, 14,800 tonnes to Croatia, 11,000 tonnes to Bulgaria, 5,000 tonnes to Italy, and 5,500 tonnes to the United Kingdom. Another 39,000 tonnes went to Turkey. This pattern points to a concerted effort by buyers to build stocks ahead of the introduction of Europe’s Carbon Border Adjustment Mechanism (CBAM) at the start of this year.

There is a significant disparity in carbon intensity among Indonesian producers. Inalum, the country’s original producer, is powered by low-carbon hydropower, while the newer smelters rely on coal. The pre-CBAM inventory build in Europe has served an additional and substantial purpose by helping to buffer the system from the shock of disrupted Gulf supply.

The key unknown is how much of this stockpile has already been consumed and when buyers will be forced back into the market to replenish inventories.

LME Futures Steady, Physical Premiums Say Otherwise

The divergence between futures and physical markets is becoming more pronounced. While the conflict-related premium has effectively vanished from LME aluminum prices, it remains very evident in CME-listed physical premium contracts. The European duty-unpaid premium has increased by 65 percent since the onset of the US-Israeli war with Iran, and the Japanese premium has more than doubled over the same period.

This split underscores a growing disconnect in market sentiment. Participants on the LME appear relatively unconcerned about the worsening security situation in the Gulf, while those dealing in the physical market continue to price in significant supply risk.