Aluminum Slides Below $3,100 as Hormuz Reopening and China Output Weigh on Prices

Aluminum futures on the London Metal Exchange have fallen below $3,100 per tonne, reaching levels not seen since February 2026. The LME cash bid price settled at $3,061 per tonne on July 2, down from $3,073 on July 1 and $3,105 on June 30, according to AlCircle data sourced from LME. The spot price tracked by Trading Economics moved to approximately $3,090 on July 6. The decline represents a 12% drop over four weeks, unwinding much of the geopolitical risk premium that pushed prices above $3,500-$3,700 per tonne during the spring supply panic.

The catalyst for the sell-off is straightforward. The Strait of Hormuz, which handles roughly 10% of global aluminum output from Persian Gulf smelters, reopened in mid-2026 following a US-Iran diplomatic agreement. The strait's closure earlier in the year had triggered a supply scramble. Aluminum from Bahrain, the UAE, Oman, and Iran — countries that collectively produce roughly 7 million tonnes of primary aluminum annually — could not reach customers in Europe, North America, and Asia. Premiums surged. The US Midwest premium touched record territory above $1 per pound in some periods. European buyers paid extraordinary markups for prompt delivery. Now, with shipping lanes reopening, those premiums are compressing and metal is flowing back into the global supply chain.

The reopening story is complicated by timing. Persian Gulf smelters did not stop producing during the closure — they stockpiled. EGA's Al Taweelah smelter in the UAE, one of the world's largest single-site aluminum plants with capacity exceeding 2.7 million tonnes per year, reportedly built significant inventory during the disruption. Repairs at Al Taweelah, noted in AlCircle's July 2 market report, briefly eased supply fears further by confirming the facility is operational. The accumulated inventory is now entering the market simultaneously, creating a wave of supply at the same moment that demand uncertainty is rising.

China adds another layer of bearish pressure. The country's primary aluminum output reached 19.22 million tonnes in January through May 2026, up 3.5% year-on-year, according to National Bureau of Statistics data published by Mysteel. China operates near its self-imposed 45-million-tonne annual capacity cap, with utilization rates around 98%. But the cap has proven porous. Goldman Sachs revised its China production forecast higher to 45.6 million tonnes for 2026 and 46.3 million tonnes for 2027, noting that strong margins are supporting restarts and production above the nominal limit. The debate over whether renewable-powered smelters should be exempt from the cap could further expand effective capacity. Meanwhile, Indonesian smelter output is ramping up, adding incremental supply to an already well-fed Asian market.

Indonesia's emergence as an aluminum producer is one of the underappreciated structural shifts in this market. The country's primary aluminum production capacity is expected to nearly triple by 2027, from approximately 800,000 tonnes in 2025 to close to 2.8 million tonnes, according to Goldman Sachs. Indonesian smelters benefit from abundant, low-cost coal-fired power and proximity to Chinese demand centers. Their rapid expansion threatens to turn Asia — historically a net aluminum importer — into a self-sufficient region, reducing the pull on Middle Eastern and Russian metal.

The combined effect of Middle Eastern supply returning, Chinese output pressing against capacity limits, and Indonesian capacity coming online has shifted the market's balance assessment. ING Think projects a global aluminum deficit of approximately 200,000 tonnes in 2026, down from earlier estimates, and narrower than the deficits many analysts predicted during the Hormuz crisis. AlCircle's structural analysis sees a slight deficit of 140,000 tonnes. But Goldman Sachs warns of a much larger surplus scenario: if Middle Eastern recovery is faster than expected, the 2027 surplus could reach 1.2 million tonnes, pulling prices toward $2,750 per tonne. The World Bank's baseline forecast of $3,200 per tonne for the 2026 average already looks ambitious given current spot prices in the low $3,000s.

Inventories complicate the narrative. Global visible aluminum inventories — LME, SHFE, and bonded warehouse stocks — stand at approximately 800,000 tonnes, equal to roughly 42 days of global static consumption. That is the lowest level in five years. LME registered stocks specifically have fallen to 303,675 tonnes as of July 1, down from 349,100 tonnes on June 17. In a normal market, falling inventories and low coverage days would be unambiguously bullish. But the market is not normal. The inventory decline reflects the physical disruption of the Hormuz closure — metal that normally flows through the Gulf was simply not arriving — rather than genuine supply inadequacy. If that metal is now arriving, inventories should rebuild.

Alumina costs are providing some cushion for smelter margins. Platts assessed FOB Australia alumina at $330 per tonne on July 1, unchanged from the prior day. The FocusEconomics June 2026 average was $308 per tonne. Under balanced conditions, alumina typically trades at 17-19% of the LME aluminum price, implying a 'normal' range of roughly $525-590 per tonne at current aluminum levels. Actual alumina prices at $300-330 per tonne are well below that band, meaning smelters are earning favorable margins on the conversion from alumina to aluminum. This margin cushion supports higher operating rates — exactly what the market does not need if it is trying to avoid surplus.

For aluminum buyers, the price decline since April is a reprieve, but not necessarily a durable one. The market is transitioning from a supply-shock environment (Hormuz closed, premiums exploding) to a more conventional supply-demand balance where Chinese policy, Indonesian capacity, and global growth determine prices. The Goldman Sachs Q3 2026 target of $3,300 per tonne sits above current spot, suggesting the bank sees the sell-off as overdone. But Goldman also notes it remains bearish relative to current forward prices around $3,400 for Q3. The bank's view — that aluminum should trade at $3,300 in Q3 and average $2,950 in 2027 — implies further downside from current levels once the Hormuz inventory overhang clears.