Geopolitical risk disturbances
In early March 2026, due to the conflict between the United States and Iran, two incidents of aluminum electrolysis supply disruptions occurred successively in the Middle East. The Qatalum aluminum plant in Qatar had to completely halt production due to a shortage of natural gas supply, while Alba Aluminum in Bahrain announced an inability to continue operations due to the blockage of the Hormuz Strait shipping lane. Against the backdrop of low global aluminum electrolysis inventory, high overseas premiums, and tight supply-demand balance, the author believes that these two incidents should not merely be regarded as isolated accidents, but rather they are a reflection of the systemic risks faced by the supply system in the Middle East, a region with high exports, high reliance on raw materials, and high geopolitical sensitivity.
Qatalum Aluminum Plant is a joint-venture smelting plant jointly owned by Qatar Energy and Norway's Hydro, each holding 50% stake. Its nominal annual production capacity of primary aluminum is 636,000 tons, and it is one of the marginal production capacities with relatively low costs globally. Since March 3rd, the plant has started a orderly shutdown after the interruption of upstream natural gas supply. It is expected to be completed by the end of March. The official statement indicates that if it undergoes a complete shutdown, full resumption may take 6 to 12 months. Currently, there is no clear restart schedule.
Aluminum electrolysis is a typical continuous and rigid process. Once the electrolytic cell is forcibly shut down, the solidification of the molten aluminum will result in the destruction of the electrolytic cell or a significant reduction in its lifespan. It usually takes 2 to 3 months to resume production, and the cost for resuming production is 800 to 1000 yuan per ton. Moreover, during the ramp-up stage, a large amount of raw materials and electricity still need to be consumed. Qatalum Aluminum Plant adopts an integrated gas power station model, which has limited energy storage capacity. In the absence of a stable gas source, the space for maintaining a soft production reduction is relatively small. The author believes that a complete cold shutdown is more likely. At the same time, in the combined environment of high temperature and salt fog in the local area, the equipment is prone to corrosion during the shutdown period, and maintenance is very difficult. Even if the gas source is restored within 6 months, it is highly likely that the production capacity will lag behind the full production level by several months.
Alba Aluminium Company in Bahrain has an annual production capacity of approximately 1.6 million tons. In 2024, its output will be 1.627 million tons, accounting for about 2% of the global electrolytic aluminum production capacity. As of March 4th, the company announced that its contract has encountered force majeure due to the blocked shipping channel in the Strait of Hormuz, preventing smooth loading and shipment. Unlike Qatalum Aluminium Plant, the current production facilities of Alba Aluminium Company are operating normally. The problem mainly lies in the blocked export logistics and inventory backlog. The short-term impact on the total annual output is limited, but the expectation of supply security has been disturbed.
From the perspective of regional layout, the combined electrolytic aluminum production capacity of the six countries in the Middle East (Iran, Saudi Arabia, the United Arab Emirates, Bahrain, Qatar, and Oman) amounts to 7.05 million tons per year. In 2025, the production will reach 6.927 million tons, accounting for over 9% of the global total electrolytic aluminum output. Among them, the electrolytic aluminum production capacities of Qatar and Bahrain are 662,000 tons and 1.6 million tons respectively, which are highly consistent with the production capacities of Qatalum and Alba, indicating that almost all of the electrolytic aluminum production capacity of these two countries is concentrated in a single factory, with a high degree of concentration.
Regarding the upstream raw materials, the built-up production capacity of alumina in the Middle East is 4.55 million tons per year, with an output of 4.492 million tons per year. The self-sufficiency rate of alumina for the aluminum plants is only 34%, and their reliance on imports is obvious. Only Saudi Arabia can basically achieve self-sufficiency with its domestic alumina production capacity of 1.85 million tons per year. The other countries have varying degrees of raw material shortages. It is known that the electrolytic cells need to be prepared 5 days in advance before shutdown. If the controlled power outage is not carried out before the raw material inventory is exhausted, the aluminum liquid will solidify in the cells, causing irreversible damage to the production equipment. Therefore, in the case of an inability to restore the raw material supply in a timely manner, it is highly likely that several aluminum plants in the Middle East will gradually shut down or significantly reduce their production load within the next month. Although the short-term shutdown of Qatalum aluminum plant has released a portion of the alumina quota, it is a certain buffer for neighboring countries such as the United Arab Emirates and Bahrain, but this buffer is not sufficient to offset the logistics risks caused by the blockage of the Hormuz Strait shipping lane.
From a global perspective, the author originally expected that the global electrolytic aluminum production would be 74.5 million tons in 2026, with a year-on-year growth rate of 1.4%; the demand would be 75.43 million tons, and there would be a shortage of 930,000 tons throughout the year. On this basis, if the annualized reduction limit of Qatalum aluminum plant is estimated to be about 600,000 tons, its scale would account for 60% of the global annual shortage. Considering that the event occurred in the beginning of the first quarter, the effective reduction in the whole year may be in the range of 300,000 to 500,000 tons, which further strengthens the already tight global supply and demand situation.
From a cost perspective, the core competitiveness of electrolytic aluminum in the Middle East stems from its relatively low electricity costs. Leveraging abundant oil and natural gas resources, the electricity cost for high-energy-consuming industries in the region is $0.032 per kilowatt-hour, which translates to $300 per ton of aluminum in terms of electricity costs. This is significantly lower than the $600 to $900 per ton in Europe and the United States. In the current cost structure of electrolytic aluminum, electricity accounts for 36% of the total cost, and changes in electricity prices have a relatively direct impact on cash costs.
Under this structure, the Qatalum aluminum plant and its surrounding area fall into the category of having relatively low global production costs. The suspension of production not only leads to a substantial reduction in supply but also indicates an upward shift in the marginal supply cost of electrolytic aluminum globally. Considering that due to the geopolitical situation, global natural gas prices remain at a relatively high level, and Qatar's liquefied natural gas exports are restricted, the electricity costs in the Middle East region will be difficult to return to their previous low levels even after the resumption of production.
Furthermore, even if the situation in the Middle East improves in the future, as long as the risk premiums for shipping and insurance in the Strait of Hormuz remain at a relatively high level, the effective production capacity of the Middle East as a global low-cost supply center will decrease. This means that the marginal advantage of ultra-low-cost production capacity in the Middle East may weaken over a considerable period of time. Combined with factors such as rising electricity prices in other regions, the increase in demand for electricity due to AI and new energy, etc., it is expected to push the global aluminum price cost center to moderately rise in the coming years.
2 Subsequent Path Deduction
In the early stage of the 2022 Russia-Ukraine conflict, the LME aluminum price rose by approximately 25% in about three weeks from mid-February to early March. Subsequently, as the supply chain was re-adjusted and the expected sanctions gradually weakened, the price gradually fell below the level before the conflict, demonstrating the typical characteristics of high volatility in sentiment combined with the return of fundamentals. An even more extreme example was that in 2021, the LME nickel price soared by over 100% in a single day due to forced trading and liquidity issues, ultimately leading to the suspension of trading on the LME. This indicates that under the combined influence of geopolitical events and low inventories, the futures prices of non-ferrous metals can deviate significantly from fundamentals in a short period of time.
The situation in the Middle East is similar. There are both short-term events such as the "attack on the Iranian consulate in Syria" in 2024, which led to a slight increase in LME aluminum prices followed by a rapid decline, and long-term situations like the European energy crisis from 2021 to 2022, during which LME aluminum prices rose by 89% from the low point and the rise in Shanghai aluminum prices reached 60%. These two types of situations essentially correspond to two completely different shock mechanisms: one does not touch the key energy and shipping channels, mainly manifested as a phased increase in risk premiums; the other deeply disrupts energy and logistics, causing prices to enter a new platform for cost-supply re-pricing.
At present, the author still cannot determine which path we are currently on. This depends on the duration of the blockage of the Strait of Hormuz and the future direction of the conflict between the United States and Iran. However, based on the current information, the author can construct several different path trends to observe and simulate the impact on the future aluminum price.
Based on the recent market trends, the author believes that the market has priced in relatively fully the events of Bahrain's export disruption and Qatar's production halt. This is reflected in the increase in aluminum prices both domestically and internationally (by approximately 5%), with the rise in the price differential between domestic and overseas markets. However, the expectations regarding the potential reduction in production in Oman, the United Arab Emirates, and Iran due to raw material shortages or direct impact of conflicts, as well as the long-term increase in energy and transportation costs, have not been fully priced in.
Compared with the situation during the 2022 Russia-Ukraine conflict, this round of shock presents three significant differences, which determine that the market is more likely to exhibit a volatile pulse-upward trend.
The market has become highly financialized. Since 2025, the market has conducted multiple rounds of expectation trading regarding geopolitical risks in resource-rich countries. Currently, the aluminum price is already at a historical high range, and the room for another single-directional sharp increase is relatively limited.
The current supply-demand situation is characterized by "mild shortage + low inventory", rather than "severe shortage + credit crunch". There is a slight shortage of aluminum globally, and alternative materials such as recycled aluminum have some flexibility. This is different from the environment during the European energy crisis in 2022, when credit contraction was combined with concentrated capacity reduction.
The fundamentals of the domestic aluminum market are relatively neutral, and the social inventory remains at a high level. Before and after the Spring Festival, the social inventory of aluminum sheets in China rapidly accumulated. As of March 2nd, it had reached 122.9 million tons, reaching the highest level in the past five years for the same period. In the short term, there has been no phenomenon of rushing to purchase at high prices in the domestic market, which will restrain the upward联动 elasticity of Shanghai aluminum prices compared to LME aluminum prices.
Overall, the author believes that the current aluminum price surge triggered by the suspension of production at the Qatalum aluminum plant is likely to manifest as a short-term upward pulse and a long-term increase in the central level, rather than a sudden sharp rise followed by a rapid retracement.
3. How to Deal with Fluctuations
Under the condition of controllable risks, the relevant assets can be hierarchically allocated and managed through single-directional, internal and external price differences and option structured combinations.
In terms of the unilateral strategy, the current LME aluminum price is operating within the range of $3,000 - $3,400 per ton. If the situation in the Middle East does not deteriorate to an extreme level in the short term, the idea of setting up a batch of long positions when there is a pullback within the range of $3,000 - $3,600 per ton has certain reference value. For the Shanghai aluminum market, considering the high domestic inventory and the still acceptable smelting profit, it is not advisable to over-trust the rise at the high level. A more prudent approach is to pay attention to the bullish opportunities within the range of $23,000 - $24,000 per ton, and moderately control the risk exposure of long positions above $25,500 per ton in the short term.
Regarding the spread between domestic and foreign prices and the cross-market arbitrage strategy, the idea of shorting the Shanghai-London ratio to establish a long position still has certain logical basis in an environment where local geopolitical conflicts have escalated and overseas supply is highly uncertain. On one hand, about 9% of the electrolytic aluminum production in the Middle East is mainly reflected in the LME pricing system, and supply-side shocks first affect the overseas market. On the other hand, the spot premium offered for Japanese MJP aluminum ingots in the second quarter on the overseas market was 13% to 28% higher than that in the first quarter, reflecting the expectation of tight overseas spot supply. Meanwhile, China's aluminum exports, constrained by policies and trade environment, have limited elasticity. The "Shanghai weak, London strong" structure has certain sustainability in the medium and short term.
In terms of option strategies, the at-the-money implied volatility of the Shanghai Aluminum options is currently around 30%, which is at a relatively high level within the historical range. It is slightly lower than the 20-day historical volatility of 37.8% and the 40-day historical volatility of 34.0%, and is within the typical event-driven high volatility range. Under this background, simple naked long call or large-scale buying of straddle options may face the dual risks of time value loss and implied volatility decline. More stable options include:
Bull market price spread strategy for price increase: For example, when the futures price of aluminum in Shanghai is around 24,800 yuan/ton, buy a slightly out-of-the-money call option (such as with an exercise price of 25,000 yuan/ton), and simultaneously sell a more out-of-the-money call option (such as with an exercise price of 26,000 yuan/ton). This way, while retaining a certain degree of upside profit elasticity, it can control the cost of premiums and the risk of implied volatility decline.
Small position long straddle strategy: In the stage where the direction is uncertain but the expected volatility is still likely to increase, a small proportion of slightly out-of-the-money call and put options can be bought to form a long straddle, in order to cope with the potential amplification of new fluctuations brought about by the situation in the Middle East. However, the position size and holding period must be strictly controlled.
If in the future, the LME aluminum futures price approaches the previous high, and the Shanghai aluminum futures price approaches or exceeds 2.600 yuan per ton and the implied volatility is significantly higher than the historical peak (such as approaching or exceeding 40%), it is advisable to cautiously consider selling a narrow straddle or implementing a covered call to cope with the decline in volatility during the event's aftermath, but strict risk management arrangements are required.
