Aluminum Rises as Middle East War Threatens Supply Disruptions

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(Bloomberg) — Aluminum climbed on concerns that critical supply routes for Middle Eastern producers will be disrupted by conflict in a region responsible for a significant chunk of global output.

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Prices for the metal advanced as much as 2.8% in early trading to $3,228 a ton on the London Metal Exchange, before paring gains. The Strait of Hormuz — a trade chokepoint off the coast of Iran — is used by many of the area’s major aluminum producers to ship out metal and bring in raw materials.

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Conflict in the Middle East spread over the weekend after the US and Israel attacked Iran, and Tehran retaliated with strikes on multiple countries. The region accounts for about 9% of the world’s aluminum production capacity, according to consultancy AZ China Ltd., and prices have typically been sensitive to spikes in regional tensions.

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Potential disruptions to flows of bauxite or alumina that feed the Middle East’s aluminum smelters present a “very significant risk”, said Li Xuezhi, head of research at Chaos Ternary Futures. Aluminum prices are likely to move higher, he said.

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President Donald Trump said US forces will continue bombing Iran until his objectives have been achieved, while calling on the Islamic Republic’s military and police to surrender or “face certain death.” Tehran has responded to the US-Israeli attacks with waves of missiles fired at neighboring countries, including Saudi Arabia, the United Arab Emirates and Bahrain — all key producers of aluminum.

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Aluminum rose 1.2% to $3,178 a ton on the LME as of 10:26 a.m. Shanghai time. Copper fell 0.7% after advancing earlier, while zinc was flat. Iran has become a notable supplier of zinc to China, which helped keep domestic prices three relatively subdued last year, compared with the rest of the world.

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The mixed response across base metals markets — and the relatively modest jump for aluminum — likely reflects broader investor fears about the impact of the escalating Iran war on energy prices and the global economy. The dollar rose on Monday, a headwind for commodities priced in the US currency.

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The aluminum market now faces a “two-way macro pull” as events in the Gulf threaten to push up regional premiums in Europe and the US, while risk-off positioning and dollar strength “exert a countervailing drag,” Citigroup Inc. analysts including Wenyu Yao said in a note. 

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Aluminum smelters typically maintain around one to two weeks of alumina inventory, limiting the immediate risks to production, Citi said. Higher premia, elevated freight rates and incremental shipping delays from the Gulf are the most plausible near-term effects, it said.

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Meanwhile, iron ore declined 0.2% to $98.15 a ton in Singapore. The Middle East is a major producer of iron ore pellets, with a 13% global share, according to BMO Global Commodities Research. Chinese steel exports to the region have been rising.

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—With assistance from Katharine Gemmell.

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