LONDON - Iranian missile attacks on Gulf smelters and the blocking of the Strait of Hormuz have knocked out almost 3-million metric tons of aluminium production capacity. Yet, eight months on, the market is seemingly unconcerned.

Indeed, London Metal Exchange (LME) three-month aluminium is now trading just above $3 000 a ton, which is where it was in early February before the US and Israel unleashed Operation Epic Fury against Iran.

Traders are betting that a combination of rising output in Indonesia and higher product exports from China can tide things over until the Gulf smelters are repaired and shipping fully resumes in the Strait of Hormuz.

The surface calm, however, masks lingering stress in a physical supply chain that is still reeling from the unprecedented disruption.

PLUGGING THE GAPS

Gulf production of primary aluminium slumped by an annualized 2.8-million tons between February and May, according to the International Aluminium Institute.

The collapse reflected the forced shutdown of Emirates Global Aluminium's Al-Taweelah smelter and damage to Aluminium Bahrain's facility, as well as logistics problems at other Gulf operators.

Regional production has since been creeping higher as both plants undergo repairs and ramp production back up, but the August run-rate of 3.5-million tons annualised was still 2.6-million tons below pre-hostility levels.

China and Indonesia have stepped in to plug the gap.

China's exports of primary metal are constrained by a hefty 30% export duty, but outbound volumes of alloy doubled year-on-year to 349 000 tons in the January to August period.

Exports of semi-finished products such as aluminium plate, sheet and strip surged by 774 000 tons to 4.46-million tons over the same period.

Indonesia's new Chinese-owned smelters are also ramping up at speed. The country exported 114 000 tons of primary metal in July, a fresh monthly record.

Around half of last year's Indonesian aluminium exports went to China but shipments since the Iran war have been dispersed across Asia, Europe and even the US.

PHYSICAL STRESS

Improved availability in Asia has caused physical premiums to ease from their June highs.

Japanese buyers have negotiated a fourth-quarter delivery premium of $255 a ton over the LME cash price, which marks a 35% decline from the previous quarter.

However, that's still higher than the $200-a-ton premium that was trading at the start of the Iran war, attesting to continued tension even in this relatively well-supplied part of the market.

European buyers are paying significantly more for their physical metal.

The CME European duty-paid premium EPDc1 is trading at $559 a ton over LME cash, double the level at the end of February.

US buyers, of course, are paying more than anyone else for their aluminium with the US Midwest premium trading at an elevated $2 312 a ton over LME cash, though this is as much about President Donald Trump's 50% import tariffs as anything else.

LOW INVENTORY

Elevated premiums are sucking available metal into the physical supply chain, leaving LME stocks at multi-year lows.

Registered inventory of 238 625 tons is the lowest level this century. Most of what remains is Russian metal, which reduces its appeal to most Western buyers.

LME off-warrant inventory has also been steadily shrinking since February and now totals just 73 509 tons, which is the lowest reading since the LME introduced this category of stocks reporting in 2020.

Time-spreads have eased considerably since June, when the cash premium over three-month metal jumped to over $100 a ton.

But there is lingering tightness in the front part of the curve. After a period of mild contango, cash has just returned to a small premium over three-month metal again.

Time-spread tension is likely to remain a feature of the London market as long as physical premiums remain so high.

The aluminium market has proved highly resilient to the sudden loss of so much production, but the stress lines are still there beneath the calm surface.