Quick Bites | War in ME tightened up commodity prices across the board

The fallout from the war in Iran, which has sent Brent crude oil from $72 to more than $90 currently, has reached a wide range of commodity markets. Prices have surged recently for agricultural products such as wheat and corn, for which fertiliser is more expensive, and for industrial products such as plastics and asphalt, which are both made from refined oil products. All this adds to inflationary pressures, which limit the ability of Central Banks to lower rates.

Source: Financial Times

For metals, the war has increased the costs of operating a mine because of the higher price of the diesel used to run trucks and other mining equipment, and due to a jump in the price of sulphuric acid, a crucial ingredient used in some copper and nickel mines.

Indeed, it is perhaps remarkable that prices haven’t risen even more than they have. China appears to be playing a role in reducing imports and releasing oil stocks from its inventories to hold prices down. Nevertheless, there is a structural problem with many of these commodity markets, and the default trend will be to see prices rise further.

We have noted previously the strength in copper. Disruptions in sulphur availability could remove as much as 125,000 tonnes of copper production in the Congo, according to consultancy Wood Mackenzie. A further 200,000 tonnes of production in Chile could be at risk because of sulphur disruptions, including China’s ban on exports of sulphuric acid, according to Morgan Stanley.

Source: WSJ

Goldman Sachs, which initially forecast a 60,000-tonne deficit in copper this year outside the US market, recently revised that up to a 640,000-tonne deficit, partly because of mine supply issues at Grasberg in Indonesia and in Congo. The US bank also increased its copper price forecast 10 per cent to $13,735 per tonne by the end of the year.

Copper prices over 5 years

Source: Trading Economics

In aluminium, the war has had a direct impact, with the Middle East accounting for almost 10% of global refined production. Major producers curbed output following Iran’s strikes, which damaged their infrastructure, and because of the challenge of getting the raw alumina they need to their smelters amid the strait’s closure.

Source: Financial Times

Meanwhile, high fuel prices triggered by the war have caused some countries to accelerate investments related to energy security, for instance in renewables, a move that is expected to boost demand for copper and aluminium over the medium term.

One key metric economists are watching is whether demand for metals is being dented by high prices or concerns over economic growth. So far, there is little sign of that happening.

The energy transition continues apace. Copper cables used in offshore wind farms, batteries, electrical vehicles and oil rigs are in high demand, with increased costs passed on to end users, who are willing to pay for them. “People are not going to stop buying cables for renewables energy any time soon,” said one analyst.

As we have maintained for over a year now, the AI buildout, increased spending on military and renewables, “just-in-case” inventory management and sovereign hoarding of critical commodities are all price insensitive strategies applied world-wide and are bullish industrial commodity prices. We remain constructive on copper in particular.