A view inside the furnace of an aluminum foundry.
Monty Luxen | From Getty Images
The U.S. and Israel’s war with Iran has disrupted aluminum supplies in the Middle East, sending prices for the base metal soaring.
Aluminum may be the most abundant metal on Earth, but it is critical to the functioning of the global economy.
It is an essential material in electronics, transportation and construction, as well as other industries such as solar panels and packaging.
When the Iranian conflict erupted on February 28, three-month LME aluminum futures initially soared as much as 10 percent by March 12, before paring back some of the gains and rising around 8 percent as the de facto closure of the Strait of Hormuz caused significant supply disruptions.
How aluminum has performed against gold, silver and copper since the Iran conflict began on February 28th.
It has been the best-performing industrial metal over the past two weeks, trading at $3,370 as of Wednesday afternoon in London, just below its four-year high.
Bahrain’s Alba, home to the world’s largest smelter, has cut 19% of its annual production of 1.6 million tonnes, further heightening concerns about global supply shortages.
Lower inventory levels and the potential for further supply disruptions in the Middle East could push prices towards $4,000 per tonne, according to metals intelligence provider CRU Group.
Guillaume Haussouf, chief analyst at CRU, said in a recent article that LME prices would likely be higher today if global demand for the metal had not slumped.
He added: “A prolonged conflict is likely to significantly alter the market outlook for the remainder of this year, as it could have a long-term impact on global supply and negatively impact demand.”
Other analysts say the answer to where prices will go next lies in China.
China is the largest producer of aluminum and tends to limit production to 45.5 million tonnes per year to reduce emissions and prevent overcapacity problems.
“If the Chinese government decides that prices are too high, they could restart many of the country’s idle smelters and the world would be filled with aluminum,” Artem Borinets, CEO of mining company ACG Metals, told CNBC Europe’s first edition on Wednesday.
Despite the recent rise in LME prices, both analysts do not believe aluminum will become as important a trade for retail investors as silver or copper.
Volinets added that he would be “surprised” to see retail investors getting involved in such an industrial component, while Osuf told CNBC that the fund’s involvement has been limited since the dispute began, as total long positions are down only slightly compared to levels at the end of January.
“Interestingly, short exposure has increased by 15,000 lots, suggesting that the majority of investors believe in future price declines,” he added.
