Metals traders started the year worrying about a looming supply crunch in copper but ended the first quarter facing a very imminent supply crisis in aluminium.
The Iran war, now in its fifth week, has dampened some of the speculative frenzy that spilled out of the gold and silver markets into the London Metal Exchange (LME) base metals complex in January.
But it has propelled aluminium to its highest level since 2022 with two Gulf smelters damaged by Iranian missile strikes and shipping through the Strait of Hormuz still severely constrained.
The fact that tin matched aluminium's first-quarter performance tells you that the metals bulls are still lurking in the wings even as surging energy prices darken the demand outlook.
EXPLOSIVE ALUMINIUM
The Iran war has exposed the fragility of the Western aluminium supply chain. The Gulf accounts for around 9% of world smelting capacity and 18% of global exports outside of China.
The initial impact was a logistics squeeze caused by the effective closure of the Strait of Hormuz. Both Qatari smelter Qatalum and Aluminium Bahrain (Alba) (ALBH.BH) reduced operating rates to preserve raw material stocks.
Then came the direct strikes. Alba was targeted by Iranian missiles and is now down to 30% capacity, while the giant Al Taweelah smelter, operated by Emirates Global Aluminium, is completely out of action after damage to its power plant, according to consultancy Wood Mackenzie.
It's a crisis that no one saw coming, and the shock waves are running down the supply chain.
Western aluminium buyers are facing a double blow from the simultaneous rise in the LME aluminium price and a sharp jump in physical premiums.
CHASING THE SCARCITY MEME
LME copper hit an all-time nominal high of $14,527.50 per metric ton in January as investors bought into the metal's enticing bull narrative of stellar demand growth and constrained supply.
There is, however, no shortage of copper in the here and now. Global exchange stocks closed March at just over 1.4 million metric tons, a multi-year high.
The growing mountain of surplus metal has dampened some of the bullish fire and LME three-month copper closed the quarter at $12,335.50 per ton, 15% below the January peak and pretty much flat on the start of the year.
The same pattern has played out in tin , which leapt to a record high of $59,040 per ton in January as investors chased the same meme of supply scarcity.
Here too, though, industrial players responded by delivering metal into LME warehouses. Registered tin stocks have jumped by 60% to 8,675 tons since the start of the year with another 2,951 tons lurking in the LME's off-warrant stocks category.
Tellingly, as with copper, there is no hint of tightness in the LME tin spread structure. Both metals are trading in wide contango, signalling no immediate shortage of units.
Nor is there any danger of shortfall in either nickel or lead markets. LME stocks of both are high and time-spreads are super relaxed.
Indeed, LME lead stocks have mushroomed to over 500,000 tons and the heavy metal is on course to take over from aluminium as the metallic financing vehicle of choice.
Zinc remains an outlier, the galvanising metal still stubbornly refusing to perform to bear script.
LME inventory has failed to rebuild in any meaningful way - stocks are up just 7,900 tons on the start of the year - and the cash-to-three-months time-spread is trading at a marginal contango of $5.00 per ton.
SECOND-ROUND IMPACT
The big question mark hanging over the LME base metals as we enter the second quarter is what impact the Iran war will have on demand.
Surging energy prices are not good news for either manufacturers or consumers.
Much of course depends on how long hostilities last, which is why metals have gone from making the headlines in January to slavishly following them in March.
For aluminium, though, the war has already gone on too long and the loss of key production assets in the Gulf is going to be felt for many months to come.
(The opinions expressed here are those of Andy Home, a columnist for Reuters.)
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