- Aluminum prices rose over 3% on Middle East conflict fears impacting supply routes
- Strait of Hormuz is a key shipping point for Middle Eastern aluminum producers
- US and Israel attacks on Iran escalated regional tensions affecting metal flows
Aluminum rallied more than 3% on concerns that a critical supply route for Middle Eastern producers will be disrupted by conflict in a region responsible for a significant chunk of global output.
The metal advanced as much as 3.6% to the highest since January on the London Metal Exchange. 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.
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.
Emirates Global Aluminium, the UAE's top producer, operates smelters in Dubai and Abu Dhabi, while Aluminium Bahrain runs one of the world's largest single-site smelters. The UAE confirmed over the weekend that debris from an aerial interception caused a fire at one of the berths at Jebel Ali port in Dubai, located just several kilometers from EGA's facility.
Photo Credit: Bloomberg
Potential disruptions to bauxite or alumina flows that feed smelters in the Middle East present a “very significant risk,” said Li Xuezhi, head of research at Chaos Ternary Futures. Aluminum prices are likely to move higher, he said.
Aluminum price spreads also tightened on Monday, with spot contracts rising to trade at a premium to later-dated futures on the LME, in a condition known as backwardation that signals spot demand is exceeding supply. Rio Tinto Group also suspended negotiations with Japanese clients over second-quarter aluminum supply, citing US and Israeli strikes against Iran.
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The miner — a top aluminum supplier thanks to smelters in Canada and Australia — had initially offered to supply its customers in Japan at a premium of $250 a ton over LME prices, but subsequently withdrew the offer, according to people familiar with the negotiations. That initial offer was already the highest since at least 2015, according to two of the people.
Last week, the aluminum market was gripped by options trades with a notional value of several billion dollars that appeared to be wagers on a major shortage of the metal. The call options — which give holders the right to purchase at a pre-determined price and time — focused on April contracts targeting a price of between $3,300 and $3,500 a ton.
Photo Credit: Bloomberg
The Middle East war poses uncertainty for metals after a tumultuous start to the year, fueled by President Donald Trump's aggressive foreign policy, fears for the US dollar and a frenzy of speculative trading in China. Aluminum in London spiked to its highest since 2022 in late January, while the US Midwest premium — a key benchmark — hit a record high above $1 a pound last month.
Trump said US forces will continue bombing Iran until his objectives have been achieved, and called on the Islamic Republic's military and police to surrender or “face certain death.” Tehran has responded to the attacks with waves of missiles fired at neighboring countries, including Saudi Arabia, the United Arab Emirates and Bahrain — all key producers of aluminum.
Aluminum was 1.9% higher at $3,200.00 a ton on the LME as of 3:16 p.m. London time.
Zinc was up 0.72%. Iran has become a notable supplier of zinc to China, which helped keep domestic prices there relatively subdued last year, compared with the rest of the world.
Still, base metals markets are also contending with broader fears over the impact of the escalating Iran war on energy prices and the global economy. The dollar rose sharply on Monday, a headwind for commodities priced in the US currency. That saw copper erasing early gains to trade about 1% lower.
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.
Aluminum smelters typically maintain around one to two weeks of alumina inventory — or more in regions with more vulnerable logistics — limiting the immediate risks to production, Citi said. Higher war-risk premiums, elevated freight rates and incremental shipping delays from the Gulf are the most plausible near-term effects, it said.
Iran has about 790,000 tons of annual aluminum smelting capacity, AZ China said in a note. Of that, between 50,000 tons and 80,000 tons has already halted as industries take precautions during the military onslaught, and more stoppages may be in store if port activity is stopped, the researcher said.
Meanwhile, iron ore closed 0.8% higher at $99.10 a ton in Singapore. The Middle East is a major producer of iron ore pellets, with a 13% of global share, according to BMO Global Commodities Research. Chinese steel exports to the region have also been rising.
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