The unrelenting spate of attacks on commercial vessels navigating through the Red Sea has sent shockwaves through the global aluminium market, causing massive disruptions in commodity trade routes. This crisis, the ever-escalating tensions, the knock-on supply chain issues, and the multifold rise in maritime shipping insurance premiums have forced a major reorganisation in the industry, with the ramifications reverberating across supply chains worldwide for end-products like automobiles and construction.

The attacks on commercial vessels navigating through the Red Sea have prompted some shipowners to opt for the longer and costlier route via Southern Africa instead of the Suez Canal and the Red Sea. The recent intensification of these attacks has heightened concerns, with tensions showing no signs of abating. This reluctance among shipowners has disrupted the flow of steel and aluminium into Europe, typically transiting through the Suez Canal, by 775,000 tonnes per month, equivalent to 9.3 million tonnes per year, as reported in some industry data.

What is going on in the Red Sea?

The Red Sea crisis is the name given to the ongoing series of attacks on commercial ships navigating one of the world’s most critical maritime routes – the Red Sea and the Bab-el-Mandeb strait. These attacks, predominantly by Iranian-backed Houthi rebels from Yemen, have heightened security concerns and disrupted the flow of trade between Europe and Asia.

The crisis has forced shipowners to reconsider the normal route through the Suez Canal, opting instead for the longer and costlier passage around the Cape of Good Hope in South Africa. This rerouting has greatly prolonged delivery times and shipping costs. Egypt has been particularly hit by the loss of transit fees from the Suez Canal.

The Red Sea is a volatile tinderbox of regional and global power struggles and sits near the heart of international trade and security architecture. The attacks have shown the vulnerability of global maritime routes and have, in turn, prompted a US-led coalition to conduct air and naval operations to safeguard shipping.

Implications for aluminium markets

The ramifications of these attacks are particularly pronounced in the aluminium market . The crisis has injected a new layer of uncertainty into an already uncertain environment, what with the recession in Europe, the Russia-Ukraine geopolitical crisis, spiralling energy costs, and rising tensions between China and Taiwan. With the shortest maritime route between Europe and Asia fraught with risks, markets are seeing a structural shift.

One of the immediate effects of the Red Sea crisis is the steep rise in freight costs and delays in aluminium shipments. Container freight has seen a sharp increase in rates, more than tripling in some cases. Rerouting vessels around the Cape of Good Hope adds weeks to delivery times, further complicating supply chain logistics. All of this translates to a sharp surge in aluminium prices (and thus the end products) at a time when the global economy can scarcely afford such issues.

The disruptions in the Red Sea have thus reverberated in the aluminium premiums market. Premiums in Rotterdam, a key hub for aluminium trade, have surged by 10-15 per cent since early December, following a long period of decline. This uptick shows the market’s sensitivity to supply uncertainties.

Europe’s aluminium production challenge

For Europe, which is heavily reliant on aluminium imports and facing constrained nearby supply, the crisis poses a major challenge. The continent’s aluminium production capacity has dwindled in recent years because of soaring energy costs and geopolitical tensions. Of course, the root of a lot of these issues is the geopolitical crisis, that has disabled the cheap gas supply to Europe.

With these supply disruptions and other logistical hurdles mounting, European industries are grappling with the prospect of higher input costs and supply constraints, right at a time when the leadership speaks of the need to remilitarise, support the green transition, and supply Ukraine, all of which would require massive amounts of aluminium.

Industry leaders are thus being confronted with a complex set of challenges. Balancing the need for supply chain resilience with escalating geopolitical risks requires a totally new approach. From diversifying supply to improving logistical ‘hardness’, adaptations are needed to mitigate the impact of the disruptions and safeguard the stability of aluminium markets. In response to this, some companies have announced plans to move production closer to bauxite sources, end markets, or to countries without much geopolitical risk.

With the Red Sea Crisis expected to continue without an end in sight, the outlook for the aluminium market is shrouded in uncertainty. This uncertainty in itself will have a negative effect on costs and demand.