Middle East supply shock outweighs demand risk, leaving the aluminium market likely in deficit in 2026

Overview

This report discusses the impact of the Middle East conflict on the global aluminium supply chain and weighs weak demand, inventories, speculative positioning, and regional premiums against their implications for aluminium prices and aluminium equities. UBS believes damaged or shut Middle Eastern smelters will reduce global primary aluminium supply in 2026; although higher prices and macro slowdown weaken demand, the supply loss is more important, leaving the aluminium market likely to enter a significant deficit. In the short term, soft demand indicators, high China inventories, and crowded long positioning in LME aluminium may lead to price consolidation; over the medium term, insufficient inventory buffers and a long recovery cycle for supply should support a higher benchmark aluminium price.

Core views

The core view is that the supply shock outweighs the demand risk. Middle Eastern primary aluminium production is not a small share of the global market, and much of the capacity depends on the Strait of Hormuz and imported alumina, carbon materials, and other inputs. Once an uncontrolled shutdown occurs, restarting and returning to normal operation can take 12 to 24 months. UBS estimates about 3mt of annualized capacity is affected and has cut its 2026 supply growth forecast to -1%. Demand has also been revised down, with 2026 growth expected below 2%, mainly due to persistent weakness in Europe, destocking in Asia, and substitution triggered by high LME prices and premiums in the US. However, with supply contracting while demand is still positive, the market is expected to be short by about 1.8mt in 2026. In 2027/28, supply recovery to 3% to 4% and demand growth recovering to about 3% should narrow the gap, though a deficit may still remain.

Analysis framework

The report uses a supply-demand balance framework, combining damage to Middle Eastern smelting capacity, restart cycles, the impact of new projects in Indonesia and elsewhere, and the possibility of idled capacity restarts in Europe and the US with demand growth, price-induced substitution, inventories, and speculative positioning. It also compares China, LME, and global visible inventories, and examines how regional premiums, tariffs, sanctions, and logistics disruptions are transmitted into physical market tightness.

Methodology notes

• 供需平衡Global primary aluminium supply-demand gap estimation

  Estimate the market gap by adjusting supply losses and demand growth forecasts.

  UBS lowered its 2026 global supply forecast to -1% and cut demand growth to below 2%; under the assumption that demand continues to grow while primary aluminium supply contracts, it estimates a 2026 aluminium market deficit of about 1.8mt.

• 供应链冲击Smelter shutdown and restart cycle analysis

  Distinguish the different effects of controlled and uncontrolled shutdowns on recovery time.

  Controlled shutdowns usually take 6 to 12 months to return to normal output; if molten aluminium freezes in the pots during an uncontrolled shutdown, restart may take 12 months, followed by another 6 to 12 months to restore normal operation.

• 库存分析Visible inventory buffer assessment

  Measure the buffering capacity against the supply-demand gap using China, LME, and global visible inventories.

  China inventories of about 1.45mt are close to record levels, but global visible inventories of about 1.9mt remain below historical standards, and LME inventories of about 350kt are mostly in Asian warehouses, so the report believes they cannot materially buffer the expected deficit.

• 市场定位LME and SHFE net speculative positioning monitoring

  Use the degree of crowded speculative longs to judge short-term price upside constraints and pullback risk.

  Net speculative longs on the LME and SHFE have continued to rise since the Middle East conflict and are close to record highs; while not a catalyst for lower prices on their own, they could trigger long liquidation if risk appetite weakens.

Asset mapping & comparison

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

• Aluminium / LME aluminium

  core research focus

  Strengths

  Middle East supply shock, low global visible inventories, a forecast 2026 deficit of about 1.8mt, and rising premiums in Europe, the US, and Japan support medium-term prices.

  Weaknesses

  Soft near-term demand indicators, China inventories near record highs, and crowded net speculative longs on both LME and SHFE.

  Comparison

  Versus copper, the report notes that aluminium demand in China during 1Q was initially stronger, but after the Middle East conflict buyers retreated as prices rose and inventories did not show a normal seasonal decline; versus zinc and nickel, aluminium's deficit thesis depends more on smelting supply shocks and insufficient inventory buffers.

  Risks

  Demand destruction, substitution by alternative materials, long liquidation as risk appetite weakens, and supply recovery faster than expected.

• Middle East primary aluminium capacity

  main source of supply shock

  Strengths

  Regional output is about 6.6mt, or roughly 9% of global supply and 23% of output outside China, so it has a meaningful impact on the global balance.

  Weaknesses

  Heavily dependent on imported alumina and carbon inputs, with about 95% of smelting production located along logistics routes linked to the Strait of Hormuz, making operations vulnerable to raw material and power disruptions.

  Comparison

  Compared with oil and gas and many mining processes, aluminium smelter restarts are slower; an uncontrolled shutdown may take 12 to 24 months to return to normal output.

  Risks

  A de-escalation of the conflict, restored logistics, or sufficient alternative transport could reduce actual supply losses; the scale of losses and the recovery path remain uncertain.

• Indonesia aluminium projects

  medium-term new supply source

  Strengths

  The report tracks four operating smelters and five projects under construction, which are expected to add about 3mt of new supply between 2026 and 2029.

  Weaknesses

  Land and power availability constrain expansion in key industrial parks, preventing rapid, unconstrained capacity growth like China's post-2008/09 expansion.

  Comparison

  Compared with the immediate supply loss from Middle East shutdowns, Indonesian projects ramp more slowly and provide limited buffer against the 2026 deficit.

  Risks

  Construction, financing, power, permitting, and ramp-up progress could fall short of expectations, or, conversely, higher prices could pull more projects into the pipeline sooner than expected.

• Aluminium equities

  equity market transmission vehicle

  Strengths

  Higher medium-term aluminium prices and regional premiums may improve revenues for upstream producers and profits for some recycling and trading businesses.

  Weaknesses

  Weak end demand, substitution caused by high prices, and volatility in energy and raw material costs will weigh on valuations and earnings leverage.

  Comparison

  The report is an industry event note and does not provide a single-company rating or target price; it notes that NHY may benefit from wider spreads between European billet premiums and ingot prices, supporting recycling and trading profits.

  Risks

  Commodity price and FX volatility, political risk, financial risk, operational risk, and changes in valuation multiples.

Key data

• Middle East 2025 primary aluminium outputabout 6.6mtroughly 9% of global supply and about 23% of output outside China.
• Middle East annualized smelting output affected by the conflictabout 3mtmore than 1.6mt of which could be uncontrolled shutdowns, with recovery taking more than 12 months.
• 2026 global primary aluminium supply forecast-1%UBS further cut the supply forecast after assessing Middle East disruptions.
• 2026 global aluminium demand growth forecastbelow 2%affected by weak European demand, Asian destocking, and high-price substitution.
• 2026 aluminium market deficit forecastabout 1.8mtthe deficit arises as demand continues to grow while primary aluminium supply contracts.
• 2027/28 supply recovery forecast3% to 4%supply recovery is accompanied by demand growth expected to rebound to about 3%, still below the historical trend.
• China aluminium inventoriesabout 1.45mtSHFE and other inventories are near record highs, and the usual post-Lunar New Year destocking has not materialized.
• Global visible aluminium inventoriesabout 1.9mtstill below historical levels and insufficient to materially buffer the forecast deficit.
• LME aluminium inventoriesabout 350ktinventories are very low and almost all are in Asian warehouses, limiting relevance for markets outside China.
• Indonesia new aluminium capacityabout 3mtprojects under construction from 2026 to 2029 may add supply, but land and power constraints limit rapid acceleration.

Impact & implications

For aluminium prices, high inventories, weak demand, and crowded longs may keep LME aluminium in consolidation after the rebound following easing Middle East tensions; however, if logistics through the Strait of Hormuz, raw material supply, and smelter restarts remain constrained, the supply gap will persist and support medium-term prices. For aluminium equities, upstream primary aluminium producers may benefit from higher benchmark prices and regional premiums, but downstream demand destruction, substitution driven by high US prices, and cost and operating disruptions will still create dispersion. Rising premiums in Europe, the US, and Japan may also improve profits for some trading, recycling, and regionally exposed supply-chain businesses, but will add pressure on end demand.

Risks

• The Middle East conflict cools rapidly, logistics routes reopen, or road transport eases raw material shortages more than expected, resulting in smaller-than-forecast supply losses.
• Global economic activity is weaker than expected, and demand in Europe, Southeast Asia, and the US continues to soften, causing growth to fall below the assumed below-2% level.
• High aluminium prices and high premiums in the US drive substitution toward paper, plastics, and other materials in packaging, creating price-induced demand destruction.
• China inventories continue to build and weigh on SHFE prices, undermining the sustainability of the global aluminium price recovery.
• Net speculative longs on the LME and SHFE are near record highs, and long liquidation and short-term price pullbacks could occur if risk appetite weakens.
• Projects and restarts in Indonesia, Europe, or the US move faster than expected, leading to stronger-than-assumed medium-term supply recovery.
• The mining and metals sector faces commodity price, FX, political, financial, and operational risks that could materially affect company or industry performance.

What to watch

• Whether logistics for raw materials and finished aluminium through the Strait of Hormuz and the Middle East recover, especially the sustainable inflow of alumina and carbon inputs into the region.
• The actual operating rates, damage severity, and restart timing of EGA Al Taweelah, ALBA, Qatalum, and Iranian smelters.
• Whether China SHFE and social inventories move down from the roughly 1.45mt high into normal seasonal destocking, and whether the SHFE discount to LME narrows.
• Whether LME inventories remain at the roughly 350kt low level and whether the geographic distribution of stocks improves.
• Trends in physical premiums in Europe, the US, and Japan, especially European billet premiums, the US tariff structure, and the impact of Russian sanctions on trade flows.
• Whether net speculative positions on the LME and SHFE fall from near-record levels and whether long liquidation appears as risk appetite weakens.
• Construction, ramp-up, power, and land constraints for Indonesian projects under construction and planning, as well as the economics of idle capacity restarts in Europe and the US.
• Whether 2026 demand growth stays below 2% but remains positive, or is revised down further because of substitution and macro weakness.