Aluminum prices slumped to their lowest level in more than two months as an interim agreement between the United States and Iran laid the groundwork for resuming metal shipments through the strategically vital Strait of Hormuz.
Price Decline and Market Reaction
The lightweight metal dropped as much as 4.4 percent in London trading after both sides agreed to a deal, with the strait expected to reopen when the agreement is formally signed on Friday. Details of the plan are still being negotiated, but the prospect of restored flows has already rattled markets.
Aluminum on the London Metal Exchange fell 4.2 percent to US$3,385.50 a ton by the close of trading. In contrast, other LME metals posted gains, with copper rising 0.4 percent to US$13,746.50 a ton and tin jumping 2.8 percent.
Impact of the Iran War on Supply
The Iran war had caused steep supply losses as Middle Eastern aluminum smelters were targeted in missile attacks and the closure of the Strait of Hormuz choked off inflows of raw materials and outbound metal shipments. Producers implemented logistical workarounds to keep plants running, but the industry still faced a major supply deficit.
Middle Eastern production, which accounts for about 10 percent of global supply, dropped by 35 percent year-on-year in April, according to Bank of America analysts including Michael Widmer. However, they cautioned that rising production in and from China could partly offset these losses.
"Aluminum prices look vulnerable near-term as supply risks ease and demand concerns persist," the analysts said in a note. Other downside risks include the potential release of Middle Eastern aluminum inventories if the strait reopens and increased supply from smelters in Indonesia.
Political Developments and Uncertainties
President Donald Trump announced on Sunday via social media that he was authorizing the "toll free opening" of the Strait of Hormuz. However, Iran will allow free transit through the waterway for only 60 days, according to Fars news agency, citing a person familiar with the matter.
Despite the political breakthrough, shipowners say they need more details to assess whether safe transits are possible. Some analysts expect that the aluminum industry will continue to struggle in replenishing diminished reserves as other supply headwinds persist.
China's Role and Inventory Drawdowns
China has ramped up exports since the war began, but producers are now encountering a government-imposed cap on output. Manufacturers have tapped inventories held on exchange and in private storage, and drawdowns may continue while flows from the Middle East remain constrained, according to Gregory Shearer, head of base and precious metals research at JPMorgan Chase & Co.
"If the strait does reopen, we could see a knee-jerk drop in prices because aluminum has been highly correlated with energy," Shearer said. "But we still conclude that the market is facing a major supply gap, and the key question is how much longer it will be before those invisible inventories are depleted, and visible inventories start to be drawn down."
Outlook
The aluminum market remains in a delicate balance, with the potential reopening of the Strait of Hormuz offering near-term relief but long-term supply challenges persisting. Investors are closely watching the final signing of the agreement and the subsequent flow of metal through the waterway.
