Middle East Conflict Causes Sharp Reduction in Aluminum Supply, 1.85 Million Ton Deficit Expected in 2026

Overview

This report deeply explores why LME aluminum futures prices did not see the expected surge amid serious supply interruptions caused by Middle East geopolitical conflicts. Morgan Stanley analysis suggests that aluminum market tightness is more manifested in physical premiums, regional premiums, and drastic changes in futures term structures, rather than solely in futures pricing charts. The report points out that due to over 4% of global capacity in the Middle East being damaged and difficult to restart, combined with China's production capacity ceiling and power restrictions in other regions, the global aluminum market is expected to face a historic shortage of 1.85 million tons in 2026. Although the current market has digest some pressure through prior stockpiling and high premiums, as inventories deplete and supply-demand gaps widen, aluminum prices face significant upside risk.

Core views

Severe Impact on Supply Side and Structural Shortage: The conflict in the Middle East directly led to the shutdown or reduction of major smelters in places such as UAE, Qatar, and Bahrain, affecting capacity totaling over 3 million tons, accounting for more than 4% of global supply. In addition, Iranian smelters also face the risk of raw material shortages and direct attacks. Since restarting aluminum smelters takes up to 12 months, this supply loss is long-term. Meanwhile, China has hit its smelting capacity ceiling, and other regions are constrained by electricity costs, making new supply extremely limited. Morgan Stanley estimates that global aluminum demand will still grow by 1.4% in 2026, where the surge in demand for energy storage systems (estimated growth of 50%) offsets the weakness in construction and solar demand, ultimately resulting in a massive market deficit of 1.85 million tons. Price Performance 'Illusion' and Real Reflection of Premiums: Investors are puzzled why LME three-month aluminum prices rose only 12% since the start of the conflict, but the report points out that spot prices actually rose 14%, and regional premiums surged significantly. Europe tax-included premium rose 55%, Japan premium rose 72%, US Midwest premium rose 9%. These premiums more accurately reflect the scarcity of physical goods in each region. In addition, the futures curve presents a steep backwardation structure, i.e., near-term prices far exceed forward prices, which greatly increases the cost of holding inventory, forcing terminal users to destock rather than stockpile, thereby statistically masking some of the direct push from physical tightness to futures prices. Market Buffer and Potential Risks: High import volumes earlier (especially large arrivals to the US from the Middle East) and a surge in Indonesian exports provided some buffer for the market. However, as cargo flowing from the Middle East to the US is cut off, the US and Europe will have to compete for Canadian aluminum resources, pushing up North American premiums. 92% of registered warrants in LME warehouses are Russian-origin aluminum; if further restricted due to geopolitical factors, or if China increases exports due to widening domestic-international price spreads, it will have profound effects on global balance. The report believes that although Chinese exports may ease overseas tightness, they will also accelerate the destocking of domestic inventory in China. Price Outlook: Under the baseline scenario, Morgan Stanley expects aluminum prices to stabilize around $3500/ton in Q4 2026. In the bull scenario, if Middle East tensions ease leading to improved sentiment and a weaker USD, or if terminal users begin restocking again, aluminum prices may break through $4000/ton. In the bear scenario, if the conflict prolongs leading to concerns about demand destruction dominating, aluminum prices may fall back to $2500/ton, but the report believes the probability of the bull scenario is currently higher.

Analysis framework

The report adopts a typical supply-demand balance sheet analysis method, combining quantitative estimates of the impact of geopolitical events on the supply curve. First, by decomposing the specific impacts of the Middle East conflict on major smelters (such as EGA, Qatalum, Alba), calculate the absolute value and proportion of global supply loss. Second, introducing 'term structure' and 'regional premium' as auxiliary observation indicators to explain the decoupling phenomenon between futures prices and spot markets; this is a key method in commodity research to identify hidden tightness. Finally, by setting three scenarios - baseline, bull, and bear - comprehensively considering the marginal impact of macro sentiment, USD trends, and inventory behavior on prices to derive multi-dimensional price forecasts.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Balance and Deficit Analysis

  By calculating the difference between total global supply (considering capacity interruption, restart time) and total demand (broken down by industry), determine whether the market is in surplus or shortage. Based on this, the report concludes a 1.85 million ton deficit in 2026, which is the core logic supporting the bullish view.

• Industry/Industrial Analysis FrameworkOthers

  Term Structure and Premium Analysis

  When futures prices fail to fully reflect fundamentals, analyze the shape of the futures curve (such as Backwardation) and physical premiums (Premium) in different regions to capture the real degree of market tightness. This report indicates that rising premiums and steep backwardation are more accurate signals of supply tightness.

• Event Gaming and Behavioral FinanceOthers

  Impact of Geopolitics on Supply Curve

  Assess the physical damage and restart difficulty of production capacity in specific producing areas caused by sudden geopolitical events (such as Middle East conflict), and thereby revise long-term supply expectations. This report emphasizes the characteristic of long aluminum smelter restart cycles (12 months), amplifying the long-term impact of short-term shocks.

Key data

• 2026 Estimated Aluminum Market Deficit1.85 million tonsRecord-level supply-demand gap
• Middle East Supply Loss Proportion>4%Proportion of global aluminum supply damaged due to conflict
• LME 3-Month Aluminum Price Gain12%Gain since conflict escalation at end of February
• Europe Tax-Included Premium Gain+55%Reflects physical tightness in Europe region
• Japan Premium Gain+72%Reflects physical tightness in Asia region
• Baseline Scenario Target Price (4Q26)~$3500/tonMorgan Stanley Baseline Forecast
• Bull Scenario Target Price>$4000/tonIf sentiment improves or restocking begins

Impact & implications

For the global aluminum industry chain, long-term supply interruption means downstream enterprises will face higher procurement costs and less stable sources. For investors, focusing solely on LME futures prices may underestimate the level of aluminum market tightness; attention should focus primarily on changes in regional premiums and term structures. US and Central/Eastern European regions will maintain high premiums as they compete for non-Russian, non-Middle Eastern sources. Chinese aluminum companies may increase exports due to widening domestic-international price spreads, but this will accelerate destocking domestically. In the long run, this helps repair global balance, but short-term may suppress overseas price gains.

Risks

• Prolonged Middle East conflict leads to demand destruction, triggering recession concerns
• Significant increase in Chinese aluminum exports alleviates overseas market tightness and suppresses prices
• Russian aluminum sources in LME warehouses further restricted or removed, leading to liquidity crisis
• Terminal users continue destocking due to high prices and backwardation structure, masking real demand

What to watch

• Restart progress and actual recovered capacity of smelters in the Middle East region
• Changes in export data for Chinese aluminum semi-finished products and unwrought aluminum
• Flow and cancellation status of Russian aluminum in LME registered warrants
• Spread changes between US Midwest premiums and European premiums, reflecting transatlantic arbitrage opportunities
• Impact of global macroeconomic data on aluminum demand (especially energy storage and construction sectors)