Aluminum prices surge as Iran conflict disrupts supply
View of the interior of the furnace in the aluminum foundry.
Monty Rakusen | via Getty Images
The US and Israel’s war with Iran increased the supply of aluminum in the Middle East and caused the prices of the base metal to rise rapidly.
Although aluminum is the most abundant metal in the world, it is vital to the functioning of the world economy.
It is an important material in electronics, transportation and construction, as well as other industries such as solar panels and packaging.
With the outbreak of the Iran conflict on February 28, 3-month LME aluminum futures initially rose as much as 10% as of March 12, then pared some of their gains to around 8% as the effective closure of the Strait of Hormuz led to a significant disruption in supply.
How has aluminum performed against gold, silver and copper since the start of the Iran conflict on February 28?
It has been the best-performing industrial metal of the past two weeks, and prices are currently trading just below a 4-year high of $3,370 in London as of Wednesday afternoon.
Alba in Bahrain, home to the world’s largest smelter, also cut 19% of its annual production of 1.6 million tonnes, raising fears of global famine.
Low stock levels and the potential for further supply disruptions in the Middle East could push prices towards $4,000 a tonne, according to metals intelligence provider CRU Group.
CRU chief analyst Guillaume Osouf wrote in a recent article that the LME price would likely be much higher right now if it weren’t for weak global demand for the metal.
“A protracted conflict will likely significantly alter our market outlook for the remainder of the year due to its persistent impact on global supply and potential negative impacts on demand,” he added.
According to other analysts, the answer to where the price might go next lies in China.
China is the largest producer of aluminum and tends to keep production limited to 45.5 million tonnes per year to reduce emissions and avoid overcapacity problems.
“If the Chinese government decides that prices are too high, it can restart a number of idle smelters in the country and the world will be flooded with aluminum,” Artem Volynets, CEO of miner ACG Metals, told CNBC’s Europe Early Edition on Wednesday.
Despite the recent price rise on the LME, both analysts do not think aluminum will become a significant trade for retail investors in the same way silver and copper have.
Volynets added that he would be “surprised” to see retail investors get involved in such an industrial element, while Osouf told CNBC that the gross long position was only marginally smaller than at the end of January, so the funds’ participation has been limited since the beginning of the conflict.
“Interestingly, short positions increased their exposure by 15,000 lots, indicating that a larger portion of investors believe in lower prices from now on,” he added.
