CITIC Construction Investment: Middle East Conflict Threatens Aluminum Supply, Aluminum Sector Valuation Recovery Underway

China Securities Construction Investment Research Report states that the ongoing Middle East conflict continues to intensify, threatening the stability of electrolytic aluminum supply in the Middle East and Europe. Historically, in May 2006, October 2021, March 2022, and January 2026, aluminum prices all challenged the 25,000 level but ultimately retreated, with valuations of the electrolytic aluminum sector suppressed to 7–8 times at this level. By 2026, China’s electrolytic aluminum production is nearing its peak, while overseas new capacity releases are slow. It is only a matter of time before aluminum prices successfully challenge the 25,000 mark in a tight supply-demand balance. Currently, geopolitical tensions in the Middle East are accelerating the deterioration of the supply-demand landscape, making it possible for aluminum prices not only to break above but also to stabilize above 25,000. When the 25,000 level ceases to be a historical high and becomes a normal price, the electrolytic aluminum sector will see a valuation recovery targeting a 10x P/E with 25,000 as an anchor.

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Middle East Tensions Threaten Aluminum Supply, Sector Valuations Recovering

(1) The ongoing Middle East conflict continues to escalate, threatening the stability of electrolytic aluminum supply in the Middle East and Europe. According to Aladdin data, by 2025, the six Middle Eastern countries will have a total electrolytic aluminum capacity of 7.05 million tons: Iran 804,000 tons, Saudi Arabia 900,000 tons, UAE 2.69 million tons, Bahrain 1.6 million tons, Qatar 662,000 tons, and Oman 395,000 tons. In terms of production, except Iran with 636,000 tons (not fully utilizing its 804,000-ton capacity), the other five countries are operating at full capacity, totaling 6.927 million tons, which accounts for 9.24% of the global electrolytic aluminum production of 74.93 million tons. With the outbreak of the US-Iran conflict and Iran’s retaliatory strikes—including blocking the Strait of Hormuz and targeting military bases—the impact on Middle Eastern electrolytic aluminum is twofold: first, limited bauxite output in the region—Iran 250,000 tons, Saudi Arabia 1.85 million tons (matching electrolytic aluminum output), UAE 2.45 million tons—while the other three countries lack bauxite capacity. If the Strait blockade persists, passive production cuts due to alumina shortages are likely. Second, about half of the electrolytic aluminum in the Middle East is for domestic use, with the rest facing export difficulties. Qatar Energy has announced shutdowns of some domestic electrolytic aluminum facilities, and Bahrain Aluminum has declared force majeure. If the blockade continues for another two weeks, more companies may declare force majeure. Even if the Strait reopens later, restoring shut capacity will take time. Additionally, the conflict has caused natural gas prices to surge, pushing up electricity prices in Europe. During the previous Russia-Ukraine conflict, energy prices led to the shutdown of one-third of operational electrolytic aluminum capacity in Europe. The ongoing US-Iran conflict continues to impact the safety of Europe’s current 3.36 million tons of operational electrolytic aluminum capacity.

(2) Overcoming the 25,000 historical high point, valuation recovery is possible. Historically, in May 2006, October 2021, March 2022, and January 2026, aluminum prices all challenged the 25,000 level but retreated, with valuations of the electrolytic aluminum sector suppressed to 7–8 times at this level. By 2026, China’s electrolytic aluminum output is nearing its peak, and overseas capacity additions are slow. It is only a matter of time before aluminum prices successfully challenge the 25,000 mark in a tight supply-demand balance. Currently, geopolitical tensions in the Middle East are accelerating the deterioration of the supply-demand landscape, making it possible for aluminum prices not only to break above but also to stabilize above 25,000. When 25,000 ceases to be a historical high and becomes a normal price, the sector will see valuation recovery targeting a 10x P/E with 25,000 as an anchor.

Risk Warning: Significant global economic recession leading to a sharp decline in consumption; uncontrolled US inflation and Fed monetary tightening exceeding expectations, with a strong dollar suppressing equity asset prices; domestic new energy sector consumption growth below expectations; real estate sector continued sluggishness.

(Source: First Financial)