Mercuria Fleeing Port Klang as Aluminum Supply Squeeze Intensifies

The immediate catalyst is clear: the effective closure of the Strait of Hormuz due to the U.S.-Israeli conflict with Iran has frozen Middle East aluminum shipments since last week. This is not a minor logistical hiccup. The region produces about seven million metric tons of primary aluminum annually, accounting for roughly 9% of the global total. The disruption is now forcing strategic physical moves in the global market.

Commodity trader Mercuria is leading the charge. According to sources, the Swiss firm has planned to withdraw or cancel nearly 100,000 tons of aluminum from LME warehouses in Port Klang, Malaysia. This move is a direct response to expectations of a supply squeeze, as the trader needs to secure metal to meet customer obligations in Europe and the United States, where shortages are already evident. The timing is critical; smelters like Alba and Qatalum have declared force majeure or begun shutting down, and restarting production is a slow, months-long process that keeps metal off the market.

Mercuria is not alone. Rival trader Gunvor also canceled over 45,000 tons from the same Port Klang warehouse last week. This coordinated withdrawal from a single key storage hub highlights a broader trend: traders are racing to secure physical metal before it becomes even scarcer. The market's reaction is being amplified by this fragile inventory system. With Russian aluminum already making up a significant portion of the remaining non-Russian metal on warrant, the rush to withdraw physical stock is draining the available supply and pushing prices higher.

The bottom line is that a geopolitical shock is triggering a physical supply shock. Traders are acting strategically to protect their positions, but their collective moves are compressing already tight global inventories and setting the stage for further price volatility.

Market Mechanics: From Physical Shortages to Price Squeeze

The physical supply shock is now fully reflected in the market's price structure. The most telling signal is the surge in regional premiums, which have climbed to levels that justify abandoning financial strategies for immediate delivery. The U.S. Midwest premium is approaching $2,400 per ton near historical records, while the European duty-paid premium has hit its highest point since September 2022. These are not minor spikes; they represent a fundamental shift where the cost of getting metal now far exceeds the cost of waiting.

This shift is driven by a change in market structure. The aluminum market has become backwardated, meaning contracts for immediate delivery are priced higher than those for future delivery. This backwardation is a powerful incentive for traders to take metal out of storage. It signals that physical supply is so tight that immediate access is worth a premium, directly fueling the rush to withdraw inventory.

The legal framework for this physical tightening is now in place. Major smelters like Alba and Qatalum have declared force majeure or begun shutting down production. These declarations provide a contractual basis for supply delays, further compressing the available physical supply and validating the urgency of securing metal elsewhere.

This physical delivery urgency is quantified in the market's own data. The rate of warrant cancellations-the process of converting a warehouse title into a physical delivery obligation-has surged from a normal range of 5-15% to over 35% of total LME warrants within a two-week period. This acceleration, from 9% to 40% of total warrants, is a clear signal of market stress. It shows that the value of capturing a high regional premium now outweighs the steady financing income generated by holding a warrant. Traders are choosing immediate physical delivery over financial yield, a classic sign that the market is pricing in a prolonged supply constraint.

The Macro Cycle Context: Geopolitics, Dollar, and Real Rates

The current aluminum price surge is a classic case of a geopolitical shock hitting a market already under structural strain. The Middle East disruption is significant, accounting for about 9% of global aluminum output and nearly 20% of the market outside China. This isn't a minor regional hiccup; it's a meaningful shock to a supply chain that was already operating with thin margins. The fragility of the system is evident in the inventory base. Global aluminum inventories are already low, and the remaining non-Russian metal on LME warrants is being rapidly withdrawn. As of late February, Russian aluminum already represented 251,700 of the 420,850 tons of warranted metal. With traders like Mercuria and Gunvor pulling out nearly 150,000 tons of non-Russian stock, the proportion of Russian metal in the system is now even higher, creating a vulnerable and politically sensitive inventory base.

This physical squeeze is playing out against a broader macro backdrop that will ultimately determine the sustainability of the rally. For industrial metals, the key long-term drivers are the U.S. dollar's strength and real interest rates. A stronger dollar typically weighs on commodity prices, as it makes dollar-denominated metals more expensive for holders of other currencies. Conversely, higher real interest rates can also pressure metals by increasing the opportunity cost of holding non-yielding physical inventory. The current price action is a powerful short-term counter-force to these headwinds, driven purely by physical scarcity and the resulting backwardation.

The bottom line is that the current price action is a cyclical event, not a permanent shift in the long-term trend. The geopolitical shock has compressed inventories and ignited a fire sale of warrants, but the market's ultimate trajectory will be dictated by the macro cycles of growth, inflation, and monetary policy. The fragility of the inventory base-over-reliant on a single, sanctioned source-highlights a key constraint. Any sustained rally will need to be supported by a broader economic recovery that can absorb the higher prices, or a shift in the dollar and real rate environment. For now, the cycle is being disrupted by a geopolitical event, but the fundamentals will reassert themselves.

Catalysts and Risks: What to Watch for the Cycle

The path forward hinges on a few key events and vulnerabilities that will determine if this is a fleeting spike or the start of a sustained cycle shift. The most immediate catalyst is the resolution of the Middle East conflict and the reopening of the Strait of Hormuz. That would ease the primary supply shock, allowing stalled shipments to resume and giving smelters like Alba and Qatalum a chance to restart production. However, the process of restarting is slow and delicate, as smelters must reduce output gradually to avoid damaging their pots. Once cooled, restarting is a months-long process that keeps metal off the market. So, even with a peace deal, a full supply recovery would be gradual, not instantaneous.

A more serious risk is that the physical shortage triggers a broader wave of smelter closures or permanent capacity loss. The current strain on the physical market, with premiums hitting record highs and traders racing to withdraw inventory, is already putting immense pressure on the system. If the supply disruption persists, it could force more smelters to shut down permanently, especially those with high energy costs or aging infrastructure. This would have longer-term supply implications, tightening the global aluminum base for years. The recent example of Trafigura's Nyrstar receiving government funding to keep its Australian smelters running highlights how fragile Western smelting capacity has become. Without a whole ecosystem approach, the risk of further closures looms large.

Then there is the macro backdrop. The current price rally is a powerful short-term counter-force to the long-term headwinds of a strong U.S. dollar and elevated real interest rates. If these macro trends reverse, it could pressure aluminum prices even if physical fundamentals remain tight. A stronger dollar would make the metal more expensive for international buyers, while higher real yields increase the cost of holding non-yielding physical inventory. The market's ability to sustain higher prices will depend on whether economic growth and demand can absorb the premium, or if a shift in monetary policy pulls the rug out from under the rally.

The bottom line is a tension between a temporary geopolitical shock and a structural vulnerability. The cycle is being disrupted, but the market's ultimate trajectory will be dictated by the interplay of conflict resolution, the resilience of smelting capacity, and the broader macro environment. For now, watch the Strait of Hormuz and the restart timelines for the Middle East smelters. Then monitor the U.S. dollar and real yields; a reversal there could cap the rally, regardless of the physical supply picture.