(The opinions expressed here are those of the author, a

columnist for Reuters)

By Andy Home

LONDON, March 19 (Reuters) - The U.S.-Israeli war on

Iran is now in its third week and its impact on Gulf aluminium

production and exports is accelerating disruption across an

already fragmented physical supply chain.

Two Gulf smelters are curtailing capacity, and the continued

closure of the Strait of Hormuz threatens more output cuts.

The Middle East accounts for around 9% of global aluminium

production - a metal essential to construction, transport and

renewable energy.

Remove China out of the equation and that ratio rises to

over 20%. Take out Russia too - the reality for U.S. and

European manufacturers under sanctions over its Ukraine invasion

- and it rises higher still.

The impact is compounded by low inventories on the London

Metal Exchange (LME), which are about to shrink a lot more as

traders scramble for units.

PHYSICAL SHOCK

The immediate price shock from the Gulf crisis drove LME

three-month aluminium to a four-year high of $3,545.50

per metric ton last week.

Now, the secondary shock is travelling down the physical

supply chain.

Japanese buyers initially baulked when global producers

offered a premium of up to $250 over the LME price for

second-quarter deliveries, a 28% increase on first-quarter

terms.

They are now snapping up a revised offer of $350 for what

serves as a benchmark for other Asian buyers.

The premium for duty-paid aluminium in Europe has

surged to $450 per ton over the LME cash price, its highest

level since late 2022.

And there's more pain for U.S. buyers, already reeling from

the impact of 50% import duties imposed last year. The Midwest

premium is now trading on the CME at $2,400 per ton over

the LME.

RISK ASSESSMENT

While LME traders are trying to price the risk posed by the

Gulf crisis to the global aluminium market, manufacturers have

no choice but to pay inflated premiums just to guarantee they

have metal.

Aluminium Bahrain and Qatalum, the Qatari smelter

joint venture between Norsk Hydro ( NHYKF ) and Qatar Aluminum

Manufacturing are powering down some 570,000 tons of

annual production capacity between them.

Export shipments have ground to a halt due to the risks to

shipping of passing through the Strait of Hormuz.

Emirates Global Aluminium, which is still operating at full

capacity, is looking to re-route shipments via the port of Sohar

in Oman, which may offer some limited mitigation.

But with no signs of de-escalation, the threat to supply is

growing with each passing day because just as product can't get

out, raw materials can't get in.

Only Saudi Arabia's Ma'aden smelter is fully integrated with

its own bauxite mine and alumina refinery. How long raw

materials stocks at the Gulf's other operators last is becoming

an increasingly moot point.

DESPERATELY SEEKING SUPPLY

The problem for buyers of Gulf aluminium is that there

aren't a lot of alternative sources of metal to plug the

widening supply gap.

China is the world's largest producer, but the country's

giant aluminium sector is geared towards exporting

semi-manufactured products - bars, rods and tubes - rather than

primary metal.

It's more competitor than saviour for Western manufacturers

looking to source primary metal.

Moreover, China's smelter system has little spare capacity,

running close to Beijing's mandated annual capacity cap of just

over 45 million tons.

Russian supply has already pivoted to Asia in the wake of

U.S. and European sanctions following the invasion of Ukraine in

2022.

Indeed, Russia has become a major supplier of primary

aluminium to China as Chinese production growth grinds to a

halt.

MARKET OF LAST RUSSIAN RESORT

Given these structural supply constraints, it's logical that

traders have turned to the market of last resort to replace what

is currently stuck the wrong side of the Strait of Hormuz.

Just over 150,000 tons of LME-warranted metal has been

cancelled in preparation for physical load-out since the start

of this month.

The action has largely played out in Malaysia's Port Klang,

which is significant since this is the primary LME storage point

for Indian-brand aluminium.

Stocks of Russian metal at the South Korean port of

Gwangyang have been left largely untouched, meaning that a

significant part of what remains in the LME storage system is

now metal that many Western buyers can't or won't take.

Nor is there much metal left in LME off-warrant storage.

These shadow stocks have been steadily draining away over the

last year and at 108,000 tons are down by 52,000 tons since the

start of 2026.

The squeeze is visible in time spreads. The benchmark

cash-to-three-months spread has inverted from contango

to backwardation, where spot supplies command a premium over

future deliveries, a classic signal of acute near-term shortage.

But the current cash premium of $18 per ton is modest

relative to physical market premiums, which provides little

incentive for fresh deliveries from an already strained supply

chain.

While the rise in oil and gas pricing has understandably

grabbed the headlines since the start of the war in Iran, the

risks to the aluminium market are equally acute.

Maybe even more so, since the Iran war is revealing just how

dependent Western buyers have become on the Middle East's

primary aluminium smelters.

(The opinions expressed here are those of Andy Home, a

columnist for Reuters.)

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(Editing by Marguerita Choy)