Aluminum prices rise as Iran conflict disrupts supply

The US and Israel’s war with Iran has increased aluminum supplies in the Middle East, sending prices of the base metal soaring.

Although aluminum is the most abundant metal on Earth, it is critical to the functioning of the world economy.

It is an essential material across electronics, transportation and construction, as well as other industries such as solar panels and packaging.

As the Iran conflict erupted on February 28, 3-month LME aluminum futures initially jumped 10% by March 12, paring some gains to around 8% higher, as the effective closure of the Strait of Hormuz caused a significant supply disruption.

It has been the best-performing industrial metal over the past two weeks, and prices are now hovering near a 4-year high of $3,370 as of Wednesday afternoon in London.

Bahrain’s Alba, which hosts the world’s largest smelter, has cut output by 19% of its annual output of 1.6 million tonnes, raising fears of a global shortage.

Low stock 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.

CRU principal analyst Guillaume Osouf wrote in a recent article that the LME price could be much higher now if not for weak global demand for the metal.

“Prolonged friction will drastically change our market outlook for the remainder of the year as it affects global supply and potentially negative impacts on demand,” he said.

According to other analysts, the answer to where the price could go next lies in China.

China is the largest producer of aluminum and restricts production to 45.5 million tons per year to reduce emissions and prevent overcrowding problems.

“If the Chinese government decides that prices are too high, they can restart several 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 recent price gains on the LME, analysts do not see aluminum becoming as significant a trade for retail investors as silver and copper.

Wolinets added that he was “surprised” to see retail investors engaging in such an industrial element, but Ossouf told CNBC that the total long position is slightly smaller than it was at the end of January, so engagement by funds since the start of the conflict has been limited.

“Interestingly, shorts have increased their exposure by 15k lots, indicating that a large portion of investors believe in lower prices from now on,” he said.