War actions in the Middle East affect not only oil but also aluminium.
Aluminium shock in the heart of the Middle East
The seriousness of the situation can be strongly evidenced by the fact that JPMorgan Chase & Co issued a drastic warning.
The industry is heading straight into a "black hole", and contrary to appearances, this is not a clickbait headline but a cold analysis of facts.
A serious and prolonged supply deficit struck the market together with concerning production losses from last month. The cause of such a deadly combination was Iranian strikes precisely aimed at key smelters in Abu Dhabi and Bahrain.
Such a tense geopolitical situation combined with shortages in the market has resulted in a 15% rise in aluminium prices since the start of the war with Iran.
LME Index, which tracks the prices of six main metals, rose by almost 12% over the last four weeks and reached a historic peak at the end of trading on Thursday.
The problem is amplified by the dire situation in the Strait of Hormuz, where neither the USA nor Iran will concede.
As a result, heavily loaded carriers are stuck in ports, unable to sail into the wide waters of global markets. It is very important that aluminium has the highest weight in the LME index, and its sudden rally pulled the entire base metals sector along.
Something like a domino effect in the metals market.
Chart. Spot market aluminium price
Source: Trading Economics
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The game for the Strait of Hormuz and hope for a peace agreement
Although the key waterway from the Middle East to global markets remains closed, investors are beginning to see that the situation in the region could improve.
Hope for an extension of the ceasefire between Washington and Tehran, and consequently leaks about an upcoming peace agreement, gave other metals a bit of breathing room.
On Friday, April 17, Donald Trump announced that Iran had agreed to the conditions it had long resisted.
It concerns giving up nuclear ambitions. Trump did not present any hard evidence for this.
We wrote more about this in the article: Dollar rate before the drop? Expert: "Gold will gain, and the dollar will lose". New forecasts for USD/PLN, EUR/PLN and EUR/USD
Tehran is silent, but at the same time does not deny these reports, creating an informational fog. For markets, however, lack of confirmation is secondary, investor sentiment matters, and they are starting to feel that stabilisation in the Middle East could soon become a fact.
This means a rapid opening of the Strait of Hormuz.
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China returns to the game and copper with a new ATH?
Aluminium is not the only metal breaking records. Copper is also rising strongly, and together with aluminium they make up almost 3/4 of the entire LME index.
Interestingly, Mercuria Energy Group and BMO Capital Markets predict that copper may soon break its historical record from January of this year.
Such high demand for the commodity is expected to result from two reasons.
First, Chinese buyers are starting to return to the market. Second, the White House will soon decide on tariff duties, stimulating increased inflow of shipments to the USA.
Copper gained 11% over the last month and is currently only 3% below its record.
Although the end of the week brought slight declines of about 0,3% (both copper and aluminium), the trend is clear - as long as supply fundamentals in the Middle East remain fragile, the metal index will stay on an upward trajectory.
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