CRU: The Impact of the Suez Canal’s Blockage on Aluminum 

Gulf Region Production is Important

The Gulf Region in terms of aluminum production comprises Bahrain, Oman, Qatar, Saudi Arabia and the UAE. Within these countries, six smelters produce about 5.9 million metric tons.

Virtually all this output leaves the region via vessel through the Strait of Hormuz and then the Suez Canal for exports earmarked for Europe and North America.

People have always worried about tensions with Iran making the Strait of Hormuz a critical pinchpoint for Gulf aluminum exports. Now, the Suez Canal blockage gives us a real-time example of the impact.

The U.S. imports about 3.5 million metric tons of primary aluminum. Canada supplies about 2.5 million tons, leaving about 1 million tons being imported by sea.

Gulf producers in 2020 supplied about 600,000 tons of this total or 60%. These imports were virtually all in value-added casthouse products such as extrusion billet and foundry alloys.

The Supply Chain Was Already Stretched Thin

The aluminum market was already re-learning two words that had been missing from its vocabulary for a long time, “inflation” and “scarcity.” Aluminum primary stocks in the U.S. were estimated to have fallen to about 600,000 to 800,000 metric tons. That represents about 1.5 to 1.9 months’ supply. Stocks of value-added products were virtually depleted with lead times of 2-3 months for what imports could be had.

Anytime aluminum stocks hit 1.5 months’ supply, people get nervous and prices become volatile…and high. London Metal Exchange aluminum prices have risen over $2,200 per ton and U.S. domestic ingot premiums (Midwest) have gone over 20 cents per pound.

Importers were already warning buyers about delays in arrivals well before the Suez problem. The global pandemic had already produced a massive container dislocation in the world, with boxes in the wrong place to serve the recovering demand. Freight costs were skyrocketing.

The Repercussions on Aluminum and All Markets

The Suez Canal blockage is a harsh reminder of how dependent global manufacturing has become on global supply chains. It’s also a wake-up call that lean manufacturing and just-in-time manufacturing have their pitfalls.

U.S. aluminum manufacturers have come to accept seaborne imports as an essential requirement to compensate for the systemic deficit in domestic supply versus demand. At the same time, ever since the global financial crisis, these manufacturers have aggressively cut inventories and reduced working capital devoted to inventory. Instead, they have become dependent on a very efficient, long distance supply chain to keep them supplied AND financial intermediaries or offshore producers to manage inventory.

The Suez problem may force U.S. manufacturing to take compensating actions to guard against future risks on this:

• Manufacturers may boost their own inventories to insulate themselves against disruptions, raising short-term demand until they reach desired “safety stocks.”

• Manufacturers may force importers to build vendor-managed inventories (VMI) or consignment stocks to compensate.

• Canada may be rewarded with more business, as it still has exportable aluminum surplus of 500,000 tons over and above current exports to the U.S.

These actions in aluminum will not be unique, and one could expect to see similar action taken in all supply chains, including steel.

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com

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