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 amid 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 ratio anchored at 25,000.

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Middle East Tensions Threaten Aluminum Supply, Sector Valuation Recovery Underway

(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, Iran has retaliated, including blocking the Strait of Hormuz and targeting military bases, impacting electrolytic aluminum in two ways: first, the limited bauxite output in the Middle East—only Iran with 250,000 tons, Saudi Arabia with 1.85 million tons (matching its electrolytic aluminum output), and UAE with 2.45 million tons—while the other three countries lack bauxite capacity. If the Strait remains blocked longer, passive production cuts due to bauxite shortages could occur. Second, about half of the electrolytic aluminum used domestically in the Middle East is produced locally, while the other half faces export difficulties. Qatar Energy has announced the shutdown of some domestic electrolytic aluminum facilities, and Bahrain Aluminum has declared force majeure; if the blockade continues for another two weeks, more companies may also declare force majeure. Even if the Strait reopens later, restoring shut capacity will take time. Additionally, the conflict has caused a sharp rise in natural gas prices, pushing up electricity prices in Europe. During the previous Russia-Ukraine war, about one-third of Europe’s electrolytic aluminum capacity was shut down due to energy costs. The ongoing US-Iran conflict continues to threaten 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 amid a tight supply-demand balance. Currently, geopolitical tensions in the Middle East are accelerating the deterioration of this balance, making it possible for 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 ratio anchored at 25,000.

Risk Warning: A significant global economic recession could lead to a sharp decline in consumption; uncontrolled US inflation and aggressive Federal Reserve monetary tightening could strengthen the dollar and suppress equity asset prices; domestic new energy sector consumption growth may fall short of expectations, and the real estate sector remains sluggish.

(Source: First Financial)