Hormuz conflict pushes up aluminium prices; tightness in the short term but long-term supply remains repairable

Overview

This report focuses on the impact of the Hormuz conflict on the global aluminium market. Bernstein believes that Middle East aluminium capacity is highly export-oriented and heavily dependent on the Strait of Hormuz, and that the conflict has already created pressure on supply chains, smelting capacity, and alumina logistics. As a result, aluminium prices have risen close to historical highs in the short term, and the market is expected to remain tight in 2026 and possibly 2027; however, the report also emphasizes that aluminium, unlike copper, does not face severe resource bottlenecks, and as damaged capacity is repaired, new projects come online, and recycled aluminium grows, the market is expected to shift back to a slight surplus after 2028.

Core views

The core view is “bent but not broken”: the conflict is sufficient to significantly push up short-term aluminium prices and industry profit margins, but not enough to alter aluminium's fundamental characteristic of long-term supply availability. The report is positive on Rio Tinto benefiting from rising aluminium prices, estimating that its roughly 3Mt of aluminium output is equivalent to about 3% of global demand, and that every $100/t increase in aluminium prices could bring about $300mn of incremental contribution to its approximately $28bn EBITDA base.

Analysis framework

The report uses a combination of supply-demand balance, capacity loss scenarios, price curves, inventories, end-demand, and project pipeline analysis. On the supply side, it focuses on damaged Middle East smelters, blocked alumina imports, the Mozal shutdown, China's 45Mtpa capacity cap, and new projects in India and Indonesia; on the demand side, it breaks down major end markets such as construction, autos, packaging, and cables, and uses CAGR forecasts through 2040 to assess the long-term structure.

Methodology notes

• Supply-demand modelGlobal aluminium supply-demand balance model

  Assess the aluminium market deficit or surplus based on capacity losses, project startups, demand growth, and inventory changes.

  The report incorporates Middle East supply disruptions, the Mozal shutdown, projects in India and Indonesia, China's capacity cap, and end-demand growth into the model, concluding that 2026-2027 may see deficits, while 2028 through the mid-2030s may return to a 1%-3% surplus.

• Valuation methodDCF and EV/EBITDA blended valuation

  Update Rio Tinto's target price using a 25/75 blend of DCF and EV/EBITDA.

  The report continues to use a blend of 25% DCF and 75% EV/EBITDA, and applies a 6.00x EV/EBITDA multiple to the 2027 forward EBITDA estimate.

• Commodity price forecastPrice deck and cycle midpoint assumptions

  Raise short-term price assumptions while maintaining the long-term price midpoint.

  The report sets the 2026 aluminium price target at $3,400/t, assuming $3,600/t in Q2 and $3,400/t in Q3 and Q4, while maintaining the long-term price assumption at $2,700/t.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Rio Tinto

  Beneficiary of rising aluminium prices; the report maintains an Outperform rating.

  Strengths

  About 3Mt of aluminium output provides high sensitivity to aluminium prices; every $100/t increase in aluminium prices could increase EBITDA by about $300mn.

  Weaknesses

  There are regional and currency differences in the current share price versus target price basis, and long-term aluminium prices may revert to the cycle midpoint.

  Comparison

  Compared with diversified miners with lower aluminium exposure, Rio Tinto is described in the report as a significant beneficiary within coverage.

  Risks

  Falling aluminium prices, rising costs, faster-than-expected capacity recovery, or weaker macro demand.

• Aluminium

  Core commodity asset, jointly driven by the Hormuz conflict, inventories, energy, and alumina supply.

  Strengths

  Short-term supply disruptions are significant, inventories are low, and the futures curve shows signs of spot tightness.

  Weaknesses

  Long-term bauxite resources are abundant, and new projects plus growth in recycled aluminium may cap persistent shortages.

  Comparison

  The report notes that constraints on new aluminium supply are weaker than for copper, and greenfield project timelines are also generally shorter than copper mines.

  Risks

  Prices normalizing after the conflict eases, projects in India and Indonesia starting up ahead of expectations, and weaker growth in construction and autos demand.

• Middle East smelters

  Source of supply disruption.

  Strengths

  The region has large-scale capacity and a strong export orientation, affecting global trade flows.

  Weaknesses

  They depend on Hormuz shipping and imported alumina, making them highly exposed to conflict, logistics, and energy prices.

  Comparison

  Compared with China's domestic demand market, Middle East supply has a more direct impact on external markets such as Europe, the United States, South Korea, Turkey, and Japan.

  Risks

  Longer smelter shutdowns, alumina depletion, and extended repair cycles.

• China aluminium market

  The world's largest consumption market and a key supply constraint variable.

  Strengths

  Construction and cable demand account for a high share of relevant global consumption, and improving domestic demand could reduce export pressure.

  Weaknesses

  The 45Mtpa capacity cap limits net additions to primary aluminium capacity.

  Comparison

  The report observes that LME inventories have fallen while SHFE inventories have risen, indicating that pressure in China's domestic market may be relatively smaller.

  Risks

  Weak property demand, declining exports, policy-driven capacity constraints, and changes in energy costs.

Key data

• Global aluminium demandAbout 100MtThe report states that global aluminium demand is about 100 million tonnes; 2025 is 99Mt.
• Middle East supply shareAbout 7% of demand; regional output about 6.9MtMiddle East production is highly export-oriented, with about 80%-85% sold into international markets.
• Potential damaged capacityUp to about 2.6MtpaMilitary strikes and conflict could cause annualized losses in Middle East aluminium capacity.
• 2026 aluminium price assumption$3,400/tOf which Q2 is about $3,600/t, and Q3 and Q4 are about $3,400/t.
• Long-term aluminium price assumption$2,700/tThe report expects a return to a more typical cycle midpoint in the coming years.
• Industry EBITDA marginAbout 44%Higher than the long-term average of about 18%, driven by recent supply shocks.
• LME inventory changeDown 76ktLME inventories have fallen since the end of February; over the same period SHFE inventories increased by 122kt.
• Global inventory coverageAbout 4.2 days of demandThe report points out that global inventories remain at historically low levels.
• Middle East alumina import demandAbout 8.0-9.0MtpaRegional smelters require a combined total of about 13Mtpa of alumina, while local output is only 4.5-5.0Mtpa.
• China aluminium capacity cap45MtpaThe report expects China to be close to its capacity ceiling, with future changes more likely to be replacements or relocations rather than net additions to capacity.

Impact & implications

The short-term impact is higher aluminium prices and higher profit margins for aluminium producers, with the spot market remaining tight, benefiting mining companies with aluminium exposure such as Rio Tinto. The medium-term impact depends on the reopening of the Hormuz route, the repair of damaged smelting capacity, power and energy costs, and whether alumina can flow back into the Middle East. The long-term implication is more moderate: aluminium resources and bauxite supply are relatively abundant, new smelting projects have shorter construction cycles than copper mines, and projects in India and Indonesia as well as growth in recycled aluminium will ease structural shortages.

Risks

• A prolonged Hormuz conflict continues to disrupt Middle East aluminium and alumina logistics.
• Energy prices rise because of the conflict, pushing up power costs and further feeding through to aluminium prices.
• Repair times for damaged capacity such as EGA Al Taweelah and IRALCO exceed the base-case assumption.
• If the conflict is resolved quickly or alternative supply recovers, aluminium prices may fall back from high levels.
• The startup pace, execution risk, and China's capacity policy regarding projects in India and Indonesia may alter the long-term supply-demand balance.
• Growth in construction, autos, and packaging demand comes in below expectations, weakening support for aluminium prices.

What to watch

• Whether the Strait of Hormuz reopens and changes in shipping insurance and logistics costs.
• The restart and ramp-up progress of smelters such as EGA Al Taweelah, Alba, Qatalum, and IRALCO.
• Middle East alumina inventories, import routes, and refinery availability.
• Trends in LME and SHFE inventories, and whether the LME aluminium futures curve remains in backwardation.
• Whether Rio Tinto's aluminium business delivers on output, costs, and aluminium-price sensitivity into EBITDA.
• Approval, construction, and startup progress of new projects in India, Indonesia, and Kazakhstan.
• Implementation of China's 45Mtpa capacity cap, export trends, and construction/cable demand.