Aluminum Shortages Coming Soon
We now know that the Strait is going to be closed for at least several months, and that’s a lot of opportunity for Iranian weapon systems to take out infrastructure on the west side of the Gulf.
We now are in the position where we need to basically write off most of the 50 years of infrastructure that has been built there. And so today we’re going to talk about metals — specifically aluminum.
Aluminum doesn’t come out of the ground like copper. It comes out as an ore called bauxite. It’s not like iron ore where one step of refining and then all of a sudden you have iron ore or steel. No, no, no, no. It requires multiple steps.
First, you take your bauxite and you basically put it in a big batch of caustic soda, which is a strong base — the sort of thing that’ll strip the flesh out of your bones — and that will remove a lot of the impurities and concentrate it into a very, very white reflective powder called alumina.
Now, alumina is produced in a number of places in the world and the Persian Gulf is not a major producer. You do have some there in the United Arab Emirates and in Saudi Arabia, but collectively you’re only talking about 3% of primary production. And alumina itself doesn’t have a huge number of uses. I mean, you can use it for pigments if you want like a white-white-white paint kind of thing, and a few other products, but most of it — over 90% of it — is then basically put into a giant vat.
You stick a couple electrodes in it and you just electrify the hell out of it, and eventually it processes itself into something called aluminum — the metal that we all know.
Now, the aluminum market is a little odd. Aluminum, more so than almost any material out there, is endlessly recyclable and is easy to recycle. All you have to do is melt it down and all of a sudden you’ve got pure aluminum again.
And so the global market is about 70% primary production that goes through the base process to become alumina, electrification, become aluminum. The other 30% is more traditionally recycled.
There was a wind quality issue. So I’m re-recording the middle of this one.
Okay. Aluminum.
We are talking about a system in the Persian Gulf where we have six major smelters working from north to south: Saudi Arabia, Bahrain, Qatar, United Arab Emirates (which has two), and then Oman.
In all cases, the vulnerability is kind of the same. A drone hit on an aluminum smelter — I don’t want to say it’s not a big deal — but nothing’s going to explode because aluminum or alumina, neither of them are flammable.
The problem is the production cycle that is required to get there.
You see, in the Persian Gulf, it is obviously oil rich. That’s what it’s known for, but it’s also natural gas rich. And oftentimes, the natural gas comes up as a byproduct of the oil production.
Now, oil is easy to move. It’s a liquid, so you can easily put it into a tanker. And tankers coming out of the Persian Gulf is what the area is known for.
But natural gas being a gas doesn’t work nearly as well. You can chill it down to like -280° and liquefy it and put it into a specialized tanker and then ship it that way. But most countries don’t do that because the upfront cost is very, very high.
In the Persian Gulf, only the Qatari do that, and they do it at scale — world’s largest facility. But for everything else, they generally try to use the natural gas in another way. Typically, they burn it in power plants for electricity, which means this region also has some of the cheapest electricity in the world.
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And the primary input for turning alumina into aluminum is electricity.
So you’ve got these six facilities. The vulnerability is Iran knows that attacking the aluminum plants really isn’t the way to shut it down.
You just shut down the whole power grid.
So either you hit the field where the natural gas is produced, the pipeline that takes it to a processing facility where they take out impurities so it can be used, or the pipeline that takes it to a natural gas-burning power plant, or you hit the power plant itself.
All of those are in the Iranian target set, and all of them have been hit to some degree during this conflict. And as the region runs out of interceptors, more and more will be struck.
As for which facilities are likely to go down first and why, again, let’s start from the north.
The Saudi facility is probably the one that looks the best or second best, because in Saudi Arabia they actually produce some bauxite. So this facility turns bauxite into alumina, and then alumina into aluminum all in the same place, and then they truck the metal out west to the Red Sea. So they’re not dependent on things coming and going.
But when you go down a little bit further south — Bahrain, Qatar — they use local natural gas for their power. They import alumina from out of region, and so with the Strait closed they can’t get their inputs in. Their power system has already been under extreme attack, and so both of these facilities are already operating at well less than half capacity, and it’s probably likely that they’re all going to be shut down within a few days — and certainly no more than a couple of weeks.
Move a little bit further south, you’ve got the United Arab Emirates. There is a smelter in both Abu Dhabi and Dubai Emirates. The problem here is they’re on the same power grid. And because of the geography of the region, where there’s a wide swath of the UAE that faces Iran, they’ve simply run out of interceptors and we’re now seeing multiple drone attacks hitting hard infrastructure without interruption.
So we should expect both of those to go down because of power issues in the next week or two.
The final one is Oman, and it is actually out on the Indian Ocean. So it’s not directly affected by the Strait of Hormuz closure, but the Iranians have shown that they’re capable of striking things on the Indian coast already. They’ve already shut down the Emirati port of Fujairah, and it’s only a matter of time before they start going after the power infrastructure throughout both the UAE and Oman, which would be more than enough to shut this one down as well.
So all of them are vulnerable in different ways. All of them will probably be going offline over the course of the next month if this war continues.
As for volume: these six facilities together — and three of them are like the three biggest ones in the world — produce roughly 9% of the world’s aluminum finished primary metal. The reason I’m kind of on that is that the Chinese keep lying about their numbers, so we’re not quite sure. So if you peel the Chinese out, they’re probably 15 to 20% of the global total.
And in a world that desperately needs to expand its industrial plant, aluminum is one of the primary limiting factors there — and we’re about to lose a lot of it.
What this means for the United States is kind of a mixed bag.
In the United States, we’re kind of a flip because of policies that were decided mid-last century. The United States actually uses recycled aluminum for 70% of our demand, and we only use new aluminum for about 1/3%. So the impact on the United States is not as big.
But we’re also in an environment where the Trump administration has decided that aluminum is one of those things that has to be protected. And so there’s a 50% tariff on imported aluminum.
So we’re in a situation where we’re looking at a primary price increase because of the shortage on the international markets, on top of the 50% increase that the Trump administration has already thrown in. And that specific tariff was not one of the ones that the Supreme Court overruled a few weeks ago.
So there’s an option for some price relief here for the United States if that tariff goes away. But overall, on a global basis, the rising shortages are going to be pretty horrific.
Aluminum is used in aerospace and automotive and construction and electrification and all kinds of things. And the world’s single largest user and producer of finished aluminum is China — and well, they’re never getting this stuff back ever.
