Global aluminum shortage is getting worse! China's aluminum export volume may hit a new high "Supply black hole" disturbance opens up aluminum price upside space

With the disruption of the Middle East, a key aluminum production region, due to war and resulting global supply gap, the rising trend in the aluminum market may stimulate China's record-scale exports. It is reported that the premium of the London Metal Exchange (LME) aluminum price relative to Shanghai aluminum futures has expanded to the highest level since March 2022. At the same time, China's aluminum exports in April increased by 15% year-on-year to 598,000 tons, the highest level since November 2024. Some analysts point out that China's aluminum exports in the coming months may further increase to a historical high of over 680,000 tons. Analysts say that demand is particularly strong for aluminum rods for power grids - as they have not been included in China's recent tightening of export tax rebate policies - as well as aluminum alloy products for wheels. Many aluminum processing companies in Henan Province, a major aluminum production area, are currently operating at full capacity to meet the surge in orders for products like ultra-thin battery foils. An executive of an aluminum company said that the company's overseas sales have increased significantly in the second quarter. In recent days, LME aluminum prices have reached a four-year high. As of the time of writing, LME aluminum futures reported $3,678.55 per ton. Although the surge in LME aluminum prices has also led to an increase in domestic aluminum prices in China, as the largest aluminum producer in the world, China has not been greatly affected by supply shortages. However, a complex factor is that part of the increase in aluminum prices is driven by market concerns that Chinese supply may tighten - if smelters are forced to reduce production to meet energy consumption and emissions reduction targets, supply may be affected. In addition, the major bauxite producing country Guinea plans to announce major reform measures next month to control the scale of bauxite exports, adding to concerns that global aluminum supply may further tighten. Statistics show that Guinea accounts for more than a third of global bauxite production, with bauxite shipments increasing by a quarter to 183 million tons in 2025, with further acceleration in the first three months of this year. Guinean Minister of Mines and Geology Bouna Sylla said that the surge in bauxite exports has led to a market downturn, with prices falling by nearly half from their peak in early last year. He said, "Supply cannot exceed demand." "We hope to adjust the quantity to bring prices back to a reasonable level." From the perspective of the industry chain, controlling bauxite exports from Guinea will change the "cost bottom" and supply expectations of the aluminum industry chain. Bauxite is the raw material for alumina, which then enters the aluminum smelting process. If Guinea tightens bauxite exports, the first to be affected are alumina plants and the middle processing system that relies on imported ore, followed by the transmission of alumina prices, smelting costs, and raw material security premiums to electrolytic aluminum. Since most of Guinea's bauxite is shipped to the Asian market, and Asia is the largest aluminum consumption and processing center in the world, this policy undoubtedly has a global pricing spillover effect. Structural damage to the supply side! Aluminum prices may soar to $4,000 The global aluminum market is experiencing the most severe supply shock in half a century, with top Wall Street investment banks sending clear bullish signals. JPMorgan warned clients that the global aluminum market is experiencing its largest supply gap in over 25 years, and aluminum prices are expected to exceed $4,000 per ton, categorizing the current situation as the market officially entering a supply "black hole". Citigroup, on the other hand, pointed out that interruptions in supply caused by conflicts in the Middle East, combined with a structural capacity ceiling, have pushed the aluminum market into the "most tense inventory in 55 years", with aluminum prices expected to rise to $4,000 per ton within the next 3 months, and the average price in 2027 during a bull market reaching $5,350. The direct trigger for the supply crisis in the aluminum market is the massive permanent loss of aluminum smelting capacity in the Middle East. Iran launched direct attacks on two key smelters in Abu Dhabi and Bahrain, causing irreversible capacity losses and driving global aluminum supply expectations significantly lower. Analysts at Bernstein point out that the Middle East conflicts have led to the destruction of facilities in the region and the withdrawal of about 3% of global aluminum supply from the market. UBS expects global aluminum supply to increase by only 0.3% in 2026, lower than the previous forecast of 2.4%. Citigroup cited Wood Mackenzie data showing that compared to pre-conflict forecasts, bauxite production in the Middle East has been significantly reduced, with losses exceeding 3 million tons. More importantly, the path to resuming production is highly uncertain and depends on factors such as the duration of the conflict, infrastructure repair time, logistics normalization, and raw material replenishment. Citigroup believes that the likelihood of a rapid V-shaped recovery in supply in the region is very low. Citigroup added that the difficulty of compensating for the loss of aluminum supply in the Middle East lies in the fact that the global aluminum system's supply elasticity is almost exhausted. The bank pointed out that after years of supply-side reforms, China's aluminum production capacity is effectively constrained by upper limits and cannot release incremental supply quickly. Outside of China, most of the profitable global production capacity is already operating at full capacity. Indonesia is one of the few regions capable of providing meaningful incremental supply, but its expansion progress and timing still face execution and ramp-up risks. Aluminum producers in Europe and America are slow to resume production and add new capacity due to problems with power supply. In the background of the supply-demand gap that cannot be resolved by supply elasticity and demand substitution, the pressure in the aluminum market must ultimately be absorbed through inventory consumption, which is currently the core market contradiction. Citigroup pointed out that before the crisis erupted, aluminum inventories were at their lowest level in 55 years. Implicit inventories, financing inventories, trader inventories, and pipeline inventories can quietly absorb the supply gap for a certain period, but as time goes on, the continued decrease in inventories will fundamentally change the market structure: aluminum inventories are not only physical buffers, but also a significant source of embedded short hedging positions related to financing and term arbitrage, and the decline in inventories means that these short positions are gradually closed, reducing the fundamental basis of embedded short positions in the market. Citigroup warned that under these conditions, a relatively small additional supply shortage could trigger disproportionate nonlinear price reactions. Citigroup's baseline forecast shows that even in a scenario of weak demand, the aluminum market's supply gap in 2026 is expected to be about 2.7 million tons. Only a severe downturn comparable to the Volcker contraction era or the extreme recession during the global financial crisis in 2008-2009 can basically stabilize inventory coverage levels, rather than rebuild inventories - a fundamental difference from historical downturn cycles in the aluminum market. In JPMorgan's view, with the global aluminum market facing a serious and sustained supply gap, the aluminum industry is heading towards a very significant supply-side "black hole". The bank believes that the aluminum market is experiencing its largest supply gap in 25 years, and the global aluminum market has shifted from traditional cyclical tensions to a structural, sustained, and difficult-to-rapidly rectify supply collapse. JPMorgan's so-called "black hole" essentially refers to the fact that once a supply gap is formed due to the loss of key smelting capacity, even if geopolitical tensions ease and logistics conditions improve, the market cannot quickly return to its original equilibrium. This current shock is seen as the most severe supply crisis in nearly a quarter of a century, not only because the blockade of the Hormuz Strait weakened the flow of raw materials and finished products, but also because Iran's direct attacks on two key smelters in Abu Dhabi and Bahrain have turned events that could have been considered "short-term transportation disruptions" into substantial smelting capacity losses. This means that market trading is no longer just about freight and risk premiums, but about real metal shortages over the next several quarters, or even longer. More importantly, the aluminum industry's supply elasticity is extremely low, making this crisis highly path-dependent. Aluminum smelting is not a typical commodity industry where "prices rise - supply immediately resumes". Once a smelter shuts down, restarting production often involves high capital, energy, equipment, and process restart costs, which are also far more complex technically than imagined by the market, so capacity recovery is usually measured in terms of "years" rather than "weeks" or "months". It is for this reason that JPMorgan defines this crisis as a supply "black hole", meaning that once the supply gap enters the market pricing framework, it will not be quickly erased by ceasefire expectations or improved shipping conditions. After the direct damage to key smelting assets, this logic has been significantly weakened, and the increase in aluminum prices now reflects more the long-term tension of irreversible production capacity losses and lagging supply recovery, rather than simply geopolitical sentiment premiums. JPMorgan emphasizes that the aluminum market is transitioning from an old narrative of long-term surplus to a new narrative dominated by production capacity destruction, limited alternatives, and regional supply imbalances, and the $4,000 target price is no longer an aggressive scenario in this framework, but a natural result of the continued expansion of the supply black hole.