China absorbs displaced aluminum as Gulf outage deepens

Alumina cargoes that would normally feed Gulf smelters are being diverted to China as regional players are unable to take delivery thanks to the closure of the Strait of Hormuz. The supply-side shock is compounded by the damage that several production lines have taken as a result of Iranian airstrikes in the war.

Refresher: The Gulf typically accounts for 9% of global aluminum output, but production fell roughly 6% m-o-m in March and remains suppressed. Qatar’s Qatalum has been operating at roughly 60% capacity since mid-March, while Bahrain’s Alba has dropped closer to 30%, from 81% before the war.

China can absorb the raw material, but it can’t fix the output shortage. “China’s domestic refineries are already running an excess — we’re talking 95-100 mn tonnes of alumina,” Andy Farida, senior metals analyst at Fastmarkets, tells EnterpriseAM. Even as more refinery capacity comes online in China — with previously delayed projects there starting to ramp up — that higher capacity, which Farida estimates at 4-5 mn tonnes, smelters ultimately face a 45 mn tonne output cap in China.

Raising output caps would be a significant policy shift for China that risks putting it in the line of fire for anti-dumping and protectionist measures in other markets, Farida notes. “Part of the reason for the 45 mn cap is due to their strong desire to have better control of the market,” he said, in addition to balancing the environmental impact of the industry as Beijing looks to hit net zero targets by 2060.

In other words: More alumina in China doesn’t mean more aluminum for the rest of the world.

The road to recovery for GCC players is long and complicated: Neither Qatalum nor Alba have their own sources of alumina (the crucial feedstock for producing metal aluminum), and typically rely on imported feedstock, Farida notes. These companies “now have to source from neighboring partners” transported by truck through Oman, which is keeping their production lines running for now but “is not feasible in the long run.”

Restarting production lines is a six- to twelve-month process — and that’s assuming the ceasefire holds and no further damage is inflicted, Farida says.

Beyond the logistics hurdles, energy is also a roadblock for Qatalum, as QatarEnergy’s suspension of gas production threw another spanner in the works. “Rebuilding that infrastructure will take years,” Farida notes.

“The supply shock is already here. The risk now is that prices become too high — and that’s when demand starts to pull back,” Farida said. Prices are hovering around their highest point since the war broke out at USD 3.6k per tonne, with some forecasts suggesting they could breach the USD 4k mark.

Enter… Russia? With few alternatives, buyers are starting to look at options that would have been off the table not too long ago. Russia is emerging as the fastest — and in many cases the only — way to plug the gap. But it’s not exactly a comfortable shift for many, even though it’s one of the few sources where volumes are immediately available, Farida says.

That leaves the market stuck between limited supply and difficult trade-offs. Market rumors suggest there is enough high-quality Russian materials to “flood the market,” which could actually end up being good news for the GCC. “It would give the GCC smelters time to repair and get back on their feet, but it’s [an unpopular] solution,” Farida says.