Aluminium prices are at a four-year high, up more than 25% this year, as war in the Middle East and a blocked Strait of Hormuz choke off nearly a quarter of the world’s seaborne metal supply.
In this episode, I speak with Paul Adkins of AZ Global Consulting about the structural shortage reshaping the aluminium market. I’ve known Paul for many years, and he’s an expert on the global aluminium industry.
We talk about which Gulf smelters have been knocked out, why a bombed plant can take a year or more to rebuild, and why China — which makes 60% of the world’s aluminium — won’t ride to the rescue.
Plus: how Europe’s carbon border rules are quietly transforming Chinese industry, and why this war could force a fundamental rethink of where the world builds its aluminium smelters.
You can listen to the full conversation on Spotify and Apple Podcasts, or read the edited transcript below.
Henry Sanderson: Paul, thank you so much for joining me today. I wondered if you could start by just explaining the supply chain of aluminium, because everyone knows about aluminium metal, but not many people know how it’s actually made. It all starts with bauxite, which is the primary ore that’s dug up to make the metal, right?
Paul Adkins: The world is relying heavily on bauxite from Guinea and also from Australia. There are other locations around the world, even places like Vietnam. The ratio, depending on the quality of the bauxite, can be as much as five to one — five tonnes of red dirt to make one tonne. So quality really makes a big difference. And then you’ve got the shipping costs on top. They run Capesize vessels from Guinea to China, for instance. With the Iran war and its impact on fuel and energy costs, that’s going to have an impact there as well.
The second step is the alumina — basically refining the red dirt down to a white powder, a heavily fused alumina powder. It requires huge amounts of electricity passed through it, which splits off the raw aluminium and creates CO₂, which is hopefully captured by the smelter and not just released into the atmosphere. So we start with a whole lot of red dirt to make the sixty, seventy million tonnes of raw aluminium that the world uses today.
Most of that — forty-five million tonnes, or sixty percent — is produced in China. The Gulf area normally produces about eight or nine percent, but most of the metal in China stays in China. So the actual seaborne trade material from the Gulf Coast represents more like almost a quarter of the world’s aluminium supply.
Henry: And most of that supply goes to North America and Europe, right? Which is why it’s been so damaged.
Paul: Yes. For China, the raw metal stays in China and China exports semi-finished or finished goods — everything from bicycles to the can stock to make beer cans in America and elsewhere.
The war has really been in two halves, and the second half is still going on. In the first four weeks through March we had basically one interruption, and that was the Qatalum smelter. Originally they said they were going to stop, but it’s tied to the Qatar energy situation with LNG, and the Qatar energy people were able to supply enough power to retain approximately sixty percent capacity. That was the only shock to the system, apart from the war itself.
But then everything changed on March 28th, when Iran attacked both the Alba smelter in Bahrain and the EGA smelter in the UAE at Al Taweelah. In doing so they knocked out the Al Taweelah smelter altogether — 1.6 million tonnes gone, just like that. The folks at Alba had already announced they were shutting lines one, two and three, which, being the oldest lines, are also the smallest contributors to total output. So their output fell to precisely eighty-one percent of capacity.
And this is the key question, Henry. Those smelters aren’t just sitting there unable to sell metal into Europe or the USA. They also cannot get raw materials in. Just in terms of bulk cargo carriers sitting outside waiting to get in, there are 155 such vessels. Not all of those are alumina or carbon — there’ll be many other materials — but that number is not going down.
The smelters inside the Gulf have had to go to very unusual practices. There’s trucking happening; materials being moved up through Sohar, whose port is outside the Gulf, so they can truck through there — but that’s 380 kilometres. There’s material being loaned from the Ma’aden smelter in Saudi Arabia up to Bahrain. There’s material coming across from the Red Sea. But none of those solutions are scalable to any meaningful measure. You’re talking about replacing a shipload of maybe 30,000 tonnes of alumina with trucks of twenty tonnes. It’s an impossible situation.
The Strait of Hormuz is still tied up one way or the other, and there’s still no great movement of ships. What we’re talking about is uncertainty. If you’re trying to run a smelter, how do you plan your supply? The ratio is approximately two tonnes of alumina for one tonne of raw metal. So you’ve got a lot of careful planning to do about how to extend your inventory of raw materials — and it’s not just one material, it’s all of them. They all have to last until supplies can arrive.
Henry: You’ve seen people like JP Morgan say the market could face its biggest supply deficit in more than 25 years. Do you think this year is going to be that kind of crisis?
Paul: I don’t remember twenty-five years ago, so I won’t try to compare. But the fact is we’ve lost 1.6 million tonnes at Al Taweelah. That’s a hole in the ground — it’s been hit by a rocket. We’ve lost some material at Alba, some at Qatalum. The other plants, like Sohar and Ma’aden, appear to be okay. But we’ve lost around two million tonnes.
Some of that, from Qatar, may come back depending on what happens there. Qatar Energy says it’ll take three to five years to fully restore their plant, though for domestic supply they may manage it quicker. Al Taweelah says twelve months to rebuild — and that’s twelve months from when the shooting stops.
And this is at a time when the so-called experts were already debating whether we’d be structurally short or structurally long. One of the key questions was Indonesia, where several new smelter projects are going up. But those can’t come on just like that — it takes years to build a smelter. So I’m not expecting Indonesia to contribute much at all. That leaves us asking: where’s the metal going to come from? China has a capacity cap, a ceiling of forty-five million tonnes, which I think the government will protect, though they may look at increasing export opportunities.
Henry: I saw data that China’s imports of alumina hit a two-year high in March. Are they ramping up production?
Paul: They are, but you need to be careful. When you’ve got a situation like the Gulf, the price signals may deceive. People like EGA were selling alumina parcels off to get rid of them — they don’t need it. You’ve got a hole in the ground where your smelter used to be; you don’t need alumina. So there were May-delivery parcels being sold. There was plenty of alumina in the market, prices fell, and the Chinese jumped in and bought material. There was a huge rise in the amount imported into China in March. But it’s all down to grabbing a quick opportunity. It was not a structural change.
Henry: So you don’t think China will ease its cap and allow a big boost in production?
Paul: They’ve had plenty of opportunities and plenty of pressure to do that in the past. But when I’ve spoken to people in Beijing, they’ve been quite adamant: that forty-five-million-tonne cap is part of a broader picture about energy conservation and protecting the environment. Another part of that project was to rapidly increase the use of secondary metal — scrap aluminium — and China has ramped that up considerably. So no, I really don’t think so. They may fiddle at the margins. The projects in Indonesia are all Chinese capital, so if those owners have metal units coming, they may elect to sell them at a higher price into the USA rather than ship them back to China.
Henry: So we shouldn’t expect a wave of exports from China to flow in.
Paul: I doubt it. Bicycles, can stock, furniture, pharmaceutical wrappers — all those things will be shipped. But raw aluminium, I don’t think so.
Henry: There are also concerns about the high-purity aluminium that Bahrain producers make for aerospace or defence. Is that potentially going to be in shortage?
Paul: To be honest, I haven’t looked at that particular corner of the market, but you’re absolutely right. I think there’s a little of that metal produced in New Zealand as well. Any specialty market — and this is a generic comment — we’ve seen force majeure called in a couple of cases and difficulty making shipments out of the Gulf.
Companies like EGA have said they’ve got metal units stored outside the Gulf, so they’re okay. But the only metal they can really store outside the Gulf is generic metal, 99.7 percent purity — what we call P1020 in the industry. Anything with an alloy in it — rolling block for can stock, roofing, maritime applications, boat sheet — anything requiring magnesium, manganese for beer cans, zinc, or other alloying materials, you can’t store. You don’t know what the customer’s going to order, or what form factor — a ten-tonne block or a five-tonne block. So any metal stored around the place is generic. Anything short is going to be the rolling block, the extrusion billet, and so on. That’s where the problem’s going to come.
Henry: Once a plant has been hit in a direct attack, it takes a long time to restart — even a planned shutdown takes a long time. After an attack, I’m guessing it’s a year or even longer?
Paul: Yes, and there are complications even there. In the case of Qatalum, it seems they were able to do a controlled shutdown — remove the metal from the furnace before it froze over, take the pots down to the right cooling temperature in a controlled fashion so you don’t damage things. If a bomb hits your factory, it’s a whole different matter. One of the missiles hit the power station, so you’ve got a sudden loss of electricity, which means you’ve just got a frozen mess of steel, aluminium and carbon. You’ve basically got to jackhammer it out — if you can even retrieve the pot shell.
To rebuild those pots — they’re essentially a kind of foundry furnace — one of the basic materials for the bottom of the pot is the cathode block. It’s an electrolysis process: an anode at the top, a cathode at the bottom. The lead time on cathodes is six months and more. So the guys trying to rebuild once the shooting stops will have to get in line, or convince competing smelters around the world to give them some space in that six-month window. And that’s just the cathode block — there are all sorts of other materials too. If the power station’s been hit, even things like transformer material are in shortage. How quickly can they rebuild their substations? There are all sorts of questions. So I treat that twelve-month window, with the greatest respect to EGA, with some worry about whether it’ll happen.
Henry: You said in your LinkedIn post that this is no longer a normal market. What do you mean by that?
Paul: I meant it in a couple of different areas. From a trading point of view, yes — we’re structurally short, we’ve seen prices rise, and we’ll see shortages in all sorts of strange places. You’re talking about electric vehicle batteries and so on; there may be shortages there. It’s not just basic P1020 — it’s an extruded shape to make the frame. Some of those things may just pop up, and it can’t be helped.
But there’s another aspect. Because we’re structurally short, we don’t yet know how these proprietors are going to deal with it, so we could see real changes. To give you an example: EGA had just announced, I think in February, that they’re going to build a new aluminium smelter in Oklahoma. I would say that’s now absolutely top priority — because it’s outside the Gulf, it diversifies their risk profile in ways they’ve never thought about before.
This goes back to a comment I’ve made in the past. In the past, we’ve put aluminium smelters where the stranded energy is — the bottom of New Zealand, Australia, the Alcoa plant in northern Finland — it’s where the energy is.
Now, as a result of this war, we have to rethink that. What we used to do was put the plant where it needed to be and then figure out the logistics. Hence bauxite travelling halfway around the world, alumina travelling halfway around the world, metal shipped halfway around the world to markets. That’s all fine when we’re not at war. But now we don’t put smelters — we’ve got a quarter of the world’s seaborne trade metal sitting behind the Strait of Hormuz. That makes no sense from a strategic point of view. And it arguably makes no sense to have sixty percent of the world’s aluminium made in China. There’s no overarching industry czar who says this is how it’ll happen, but boards of directors will definitely be recalibrating their decision-making.
Henry: That’s really interesting — that could accelerate localisation, but it could also increase the carbon footprint of aluminium if you’re building based on national security.
Paul: The folks in the Gulf have been very focused on reducing their carbon footprint. There are two essential elements. One is the electricity source — in Australia it all comes from coal, so Australian smelters are high on the scale; whereas with hydroelectricity, like in Canada, you’ve removed that element.
The second part is the electrolysis process itself, where you need half a tonne of carbon to make one tonne of pure aluminium, and that half-tonne of carbon ends up as carbon dioxide. The industry’s been working to reduce that footprint in both evolutionary and revolutionary ways — there’s a project in Canada looking at removing the carbon part of the process altogether.
But not to pick on anybody — one thing that could happen is that Indian smelters see an opportunity to ramp up, turn on every pot they can. Indian smelters mostly run off coal, so there’d be more coal-fired aluminium coming out. I’m not sure Australia has any spare capacity, but anybody seeking to bring units into the market to replace the Middle East is probably going to increase the carbon footprint.
The one exception — I actually wrote about it in the newsletter today — is Rio Tinto. They’re already running their Canadian smelters very well and efficiently, and the bosses have called for them to squeeze out every tonne they can. When metal’s at three and a half thousand dollars a tonne, of course you’re going to do that.
Henry: What about China? You said they produce sixty percent. It’s always been a question why we’ve let China dominate production when they rely on so much coal-fired power — but in the last few years they’ve been moving more to hydropower. What’s the progress in China in terms of decarbonising the industry?
Paul: Let me take a step back. We got caught asleep because we were all tied up with the global financial crisis in 2008, 2009, 2010. You’ll remember when Wen Jiabao [former premier of China] got up there and was splashing the cash. One of the things he splashed cash on was building aluminium smelters — I think around four million tonnes of new capacity built in the period 2010 to 2012. That spurt then went to places like Inner Mongolia and Shandong in the north.
But by the mid-2010s China was getting smarter, and of course there was new leadership. So from about 2017, China brought in a rule that said no more than forty-five million tonnes of raw metal capacity.
At the same time, a couple of smart operators moved down to the southwest, specifically Yunnan province, where there are massive hydroelectric schemes — these make the Three Gorges Dam look like a lake. Before we knew it there were six or seven million tonnes of aluminium capacity parked in the southwest corner of China. And because it’s hydroelectricity, the electricity part of the equation is eliminated. You’ve still got the carbon anode — they’re still running about three and a half to four tonnes of CO₂ per tonne of aluminium.
But China has done something else that doesn’t get as much airplay: they’ve introduced their own certification program. Now, if you’re running at three and a half or four tonnes of CO₂ per tonne, you can be awarded a green aluminium certificate. There’s a lot of this going on, especially in the last two to three years — a focus not just on reducing the carbon footprint but on accrediting the proprietors with certificates to show they’ve done it. That’s been a major push in China. And I’ll let you have one guess as to why they might be doing that.
Henry: To set their own standards?
Paul: It’s CBAM. CBAM has very tight rules on the amount of carbon dioxide allowed, and the offsets between European-produced aluminium and metal produced elsewhere. So what the Chinese proprietor can do — and this isn’t just face-to-face, it’s as the metal goes downstream — is, if you’re making bicycles in China using green aluminium, you can attach that green aluminium certificate to your bicycle and supply it to the retailer in Brussels or London. So the certification program looks great, with a lot of publicity at the top level in China — but the real play is at the export level, convincing buyers the metal is green.
Henry: It’s extraordinary that Europe’s regulations have caused such a massive change in China’s industry. Has Europe pushed China to go green in aluminium?
Paul: China is a many-headed monster. At the political level there’s a certain amount of pressure, but at the trading level it’s a whole different story — and that’s where the real pressure is. The Chinese proprietors are very adept at figuring out pathways to get their metal into Europe, and this certification program is one part of that. The net result is that China’s exports of semi-finished and finished metal have barely changed. It may have changed in terms of exports to the USA, thanks to the tariffs, but overall China’s aluminium exports really haven’t suffered at all.
Henry: Does that make it harder for Western companies to compete on the green angle? I remember five years ago that was always the competitive edge, but presumably that’s no longer the case.
Paul: This is where I say we’ll see another repercussion from the Gulf war. There’s a certain amount of metal sitting in Europe — we’re now seven weeks into the war. Some is trickling out through alternate trucking routes, but whatever was in inventory is now falling. Eventually that comes to a problem of shortage. And we understand, from talking to producer factories around China, that they’ve received a very marked increase in inquiries. So far only inquiries — but if you’ve got a small factory in Germany or France or Italy, you’re definitely going to be looking for replacement metal.
Europe is not able to supply itself. Aluminium Dunkerque is a great plant, running on nuclear, a top-notch operation — but they can’t supply all of Europe. Russia makes a lot of metal, three and a half million tonnes, but that’s Russia. Most of the metal coming into Europe was coming from the Middle East, and now that’s under a lot of constraint. So if this war is still going, we’re going to start to see real problems in some of those smaller shops that maybe don’t have the cash to cover high costs. With the metal price where it is and premiums as high as they are, you’ll get resistance from customers before you can pass that cost on. So there’s going to be a lot of pain coming in Europe in the coming months.
Henry: And Japan too, which relies on imports from the Middle East.
Paul: Exactly. Japan also gets a lot of metal from Australia — they won’t take much, if anything, from China. I’m pretty sure Press Metal in Malaysia also sells to Japan, and the Indian smelters like Vedanta and NALCO sell to Japan too. But those long-term relationships will get tested as prices go up and people can’t pass costs on as quickly. At the start of April, end of March, Rio Tinto was in the middle of negotiating the delivery premium. In Japan the premium is set quarterly, whereas in America it’s set daily. In the middle of negotiations, Rio Tinto basically cancelled and said: no, we’re putting it up a hundred dollars a tonne, that’s all there is to it. So it went from around $265 a tonne to $365 overnight. Traditional, trusted relationships may well get tested in these coming weeks.
Henry: To finish up — it’s going to cause a lot of pain across a lot of industries in Europe, America and Japan before it gets better.
Paul: Yes. But to take a macro view: we’re at a hiatus at the moment in the Middle East — there’s no shooting right now. But if things deteriorate again, the impact on oil and fuel, transport costs, gasoline, aviation fuel and so on will have such a profound impact on the global economy that we could be in a situation where metal prices are high but demand is low. That would be a diabolical situation. So I’m sounding very pessimistic — I’m talking worst-case scenarios here.
Henry: Paul, thank you so much for your time today.
