The Hormuz conflict pushes up aluminium prices, but does not change the long-term view that supply can recover

Overview

This report discusses the impact of the Hormuz conflict on the global aluminium market. Bernstein believes the conflict has "bent" but not "broken" the Middle Eastern aluminium supply chain: in the short term, damaged capacity, transport disruption, and tight alumina supply will keep aluminium prices elevated and may create market deficits in 2026 and 2027; but over a longer cycle, abundant bauxite resources, shorter smelter project lead times relative to copper mines, new projects in India and Indonesia, and growth in recycled aluminium will gradually restore supply.

Core views

The core views are: first, about 2.6Mtpa of Middle Eastern aluminium capacity, roughly 3% of global demand, has been affected by military conflict, and facilities such as EGA Al Taweelah and IRALCO may require a long time to repair; second, the global spot aluminium market is tight, with LME backwardation, low inventories, and high profit margins all pointing to short-term supply-demand pressure; third, the 2026 aluminium price forecast has been raised to US$3,400/t, but the long-term price is still expected to fall back to US$2,700/t; fourth, Rio Tinto, with about 3Mt of aluminium output, has leverage to higher prices and is one of the more direct beneficiaries in the coverage universe; fifth, long-term new supply, recycled aluminium, and China's 45Mt capacity cap will jointly determine the path of future market rebalancing.

Analysis framework

The report uses a combination of supply-demand balance modeling, regional capacity damage estimates, LME and SHFE futures curves, inventory changes, industry profit margins, project commissioning probabilities, and downstream demand structure analysis. It assumes 3 to 6 months of disruption for Middle Eastern smelters, around 12 months offline for EGA Al Taweelah and IRALCO followed by gradual ramp-up, while discounting new projects in India, Indonesia, and elsewhere for execution risk.

Methodology notes

• Supply-demand modelGlobal aluminium supply-demand balance model

  Incorporates supply disruptions, demand growth, new project commissioning, and recycled aluminium growth into the annual balance table.

  The model shows deficits in 2026 and possibly 2027 due to supply disruptions, followed by a potential return to 1%-3% surplus from 2028 through the mid-2030s as capacity recovers and projects convert into output.

• Valuation methodDCF and EV/EBITDA blended valuation

  Rio Tinto's target price uses 25% DCF and 75% 2027 EV/EBITDA multiple.

  The report uses a 6.0x 2027 expected EBITDA multiple and raises the target price in combination with updated commodity price assumptions and exchange-rate estimates.

• Price assessmentFutures curve and inventory signals

  LME backwardation and falling inventories are used to validate spot market tightness.

  LME aluminium futures have been in backwardation since the start of the Iran war, with the 12-month future about 8% below spot; LME inventories have fallen 76kt since late February, while SHFE inventories have risen 122kt over the same period, indicating tighter conditions globally ex-China.

Asset mapping & comparison

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

• Aluminium / LME aluminium

  Core research subject

  Strengths

  Middle East supply disruptions, LME backwardation, low inventories, and rising power costs jointly support short-term prices.

  Weaknesses

  In the long term, ample bauxite resources and shorter smelter project cycles mean new projects and recycled aluminium may ease supply constraints.

  Comparison

  Compared with copper, bauxite resources are more abundant and the structural difficulty of adding new supply is lower.

  Risks

  Prices may fall after the conflict is resolved, while faster-than-expected new capacity or weaker demand would also pressure prices.

• Rio Tinto

  Main beneficiary stock

  Strengths

  About 3Mt of aluminium output gives it direct leverage to rising aluminium prices; the report maintains Outperform and raises the target price.

  Weaknesses

  Elevated aluminium prices may be unsustainable, and the share price has already reflected some of the commodity-price benefit.

  Comparison

  The report says Rio Tinto is among the more significant beneficiaries of rising aluminium prices within its coverage universe.

  Risks

  Falling aluminium prices, project execution, exchange rates, and rising costs could all affect earnings and valuation.

• Middle East smelters

  Source of supply disruption

  Strengths

  The region has large output and a high export share, making it an important source of global supply under normal conditions.

  Weaknesses

  It depends on Hormuz routes, alumina imports, and energy supply, making its vulnerability especially evident during conflict.

  Comparison

  Compared with China's domestic market, Middle East disruptions have a more pronounced impact on the global market ex-China.

  Risks

  Repair timelines, transport disruptions, and alumina shortages may prolong the supply gap.

• Secondary aluminium recycling

  Long-term supply buffer

  Strengths

  Expected to grow at close to 4% CAGR through 2040, helping narrow the supply-demand gap.

  Weaknesses

  It cannot fully offset the shutdown of Middle Eastern primary aluminium capacity in the short term.

  Comparison

  Its growth rate is higher than the 0.9% CAGR of primary aluminium supply and also higher than total demand growth of about 2.2% CAGR.

  Risks

  Scrap collection systems, quality requirements, and regional supply-chain constraints may affect the pace of delivery.

Key data

• Global aluminium demandAbout 100MtThe order of magnitude of global aluminium demand given at the start of the report.
• Impaired capacityAbout 2.6MtpaEquivalent to about 3% of global demand, mainly from Middle Eastern smelters affected by military conflict.
• Middle East regional output6.9MtAbout 9% of global primary aluminium output, or about 7% of primary plus recycled aluminium.
• Middle East export dependence80%-85%Regional aluminium output is highly oriented toward international buyers and depends on Hormuz-related routes.
• 2026 aluminium price forecastUS$3,400/tAbout US$3,600/t in the second quarter, and about US$3,400/t in the third and fourth quarters.
• Long-term aluminium price assumptionUS$2,700/tThe report keeps its long-term price assumption unchanged.
• Industry EBITDA margin44%Above the long-term average level of 18%.
• Rio Tinto price sensitivityEvery US$100/t change in aluminium price affects EBITDA by about US$300 millionBased on a simplified estimate using about 3Mt of aluminium output and about US$28 billion of EBITDA.
• Aluminium demand growthAbout 2.2% CAGR to 2040The report expects long-term demand growth to be below the growth rate of recycled aluminium supply.
• Recycled aluminium supply growthClose to 4% CAGRGrowth in recycled aluminium supply will narrow the medium- to long-term supply-demand gap.

Impact & implications

For investors, short-term aluminium price gains and expanding industry margins benefit mining companies with larger aluminium output, especially Rio Tinto; however, this tailwind is more cyclical than permanent. For downstream users, consumers in Europe, South Korea, the United States, Turkey, and Japan that rely on Middle Eastern supply face pressure from raw material costs and supply stability. For the commodity market, if the Hormuz conflict remains unresolved or energy prices continue to rise, aluminium prices still carry further upside risk; but long-term new projects and recycled supply imply that high prices may gradually retreat.

Risks

• If the Hormuz conflict persists, the supply disruption could last longer than the base-case assumption, and aluminium prices could rise further.
• Rising energy prices would lift smelting costs and further intensify upward pressure on aluminium prices.
• If the conflict eases quickly and transportation recovers, short-term high prices and high margins could fall back relatively quickly.
• There is uncertainty around the repair timelines for damaged capacity such as EGA Al Taweelah and IRALCO.
• If new projects in India, Indonesia, and elsewhere come online faster than expected, the medium- to long-term market could turn to surplus earlier.
• Changes in China's domestic demand and exports will affect the balance of the global market ex-China.

What to watch

• Navigation through the Strait of Hormuz and the recovery of Middle Eastern ports, shipping insurance, and logistics.
• The restart progress of smelters such as EGA Al Taweelah, Aluminium Bahrain, IRALCO, and Qatalum.
• Whether LME aluminium inventories, SHFE inventories, and the LME forward curve remain in backwardation.
• Whether alumina supply, regional inventories, and Middle Eastern import routes stabilize again.
• The pass-through of natural gas, coal, and electricity prices to aluminium smelting costs.
• The approval, construction, and commissioning pace of new projects in India, Indonesia, and Kazakhstan.
• China's 45Mt capacity cap, domestic demand, and changes in aluminium product exports.