The Hormuz crisis reshapes the metal pricing logic! Stagnant inflation clouds drag down copper prices, aluminum market faces supply panic.

Due to the failure of weekend negotiations between the US and Iran and US President Donald Trump's pledge to blockade the Strait of Hormuz, this has brought even greater uncertainty to the already volatile bulk commodity metal market, which has been in turmoil for the past six weeks due to the ongoing geopolitical conflict in the Middle East. Copper prices fell significantly on Monday, while a key aluminum price difference widened sharply and the LME aluminum price reached its highest level in four years, highlighting the extreme tightness in physical aluminum supply after the large-scale reduction in aluminum production capacity in the Middle East. It is understood that the latest geopolitical negotiations between the US and Iran held in Pakistan over the weekend ended in failure, and subsequently Trump pledged to implement a naval blockade on the crucial maritime chokepoint - Trump threatened to blockade the Strait of Hormuz at 10am EST on Monday, causing the brief optimism in the market last week to quickly dissipate. As energy prices soar, it may lead global central banks to adopt a more hawkish monetary policy stance and further drag down the global economy. The global industrial metals market as a whole faces significant risks of weakening demand expectations, but aluminum is an exception - aluminum has risen due to the extreme tightness in supply of physical aluminum following the substantial reduction in aluminum production capacity in the Middle East due to the war. After the failure to reach a peace agreement between the US and Iran over the weekend and the temporary cessation of negotiations, investors' current focus is undoubtedly on the longer-lasting high energy costs near historical highs, which could exacerbate the already high price pressures, and completely shatter expectations of a rate cut by the Federal Reserve. The increasingly fragile ceasefire expectations between the US, Israel, and Iran are pushing global stock and bond market traders to refocus on inflation and greatly strengthen the expectation that interest rates will remain at historically high levels for a longer period of time (known as "Higher-for-Longer"). The prolonged high energy costs are expected to significantly increase global price pressures that were already rising before the Iran war, leading to a substantial increase in market expectations for inflation and even stagflation, reducing expectations of a rate cut by the Federal Reserve and even beginning to price in the possibility of the Federal Reserve and other global central banks returning to a tightening policy, becoming the primary consideration for stock and bond investors and professional traders. The immediate prices of major industrial metals on the London Metal Exchange also reflected this dynamic: on Monday morning, LME copper prices fell by 1.3%, while LME aluminum prices rose by 1%. The significantly different logic behind the trends of copper and aluminum prices - macro expectations and supply shocks The clearest signal of intensified supply pressure in the aluminum market is reflected in the widening aluminum price spot premium on the London Metal Exchange. The spot contract price of aluminum, one of the core industrial metals globally, surged 37% compared to the main futures contract for delivery in three months on Friday, reaching $91.50 per ton, the highest level since 2007. This indicates an increasing demand for spot deliveries that can be delivered immediately as buyers seek alternative sources of the metal. Emirates Global Aluminium PJSC (EGA), the largest aluminum producer in the Middle East, has halted production at one of its smelters after an Iranian missile attack and has invoked force majeure for at least part of its deliveries. Statistics show that the Middle East accounts for nearly 10% of global aluminum production. Just before Trump's latest statement, the US military announced that it would implement a blockade of all sea traffic going in and out of Iranian ports at 10am Eastern Time on Monday, and added that if other ships do not halt at ports of the Islamic Republic, they can still pass through the Strait of Hormuz. The US military also stated that the blockade "will be enforced against all countries' vessels entering and leaving Iranian ports and coastal areas, including all Iranian ports in the Arabian Gulf and the Gulf of Oman". In the short to medium term window of this Middle East conflict, copper prices are mainly driven by "macroeconomic expectations, market risk preferences, and global actual demand", while aluminum prices are mainly driven by "Middle East supply expectations and global logistics bottlenecks". Copper is more like trading on global macroeconomic growth expectations and risk preferences: when ceasefire expectations are high, the market will first bet on a drop in oil prices, easing stagflation risks, and recovery in manufacturing demand. Therefore, copper prices rose to a three-week high due to the temporary easing of tensions in the Strait of Hormuz; but when negotiations between the US and Iran failed, the US proposed a blockade of the Strait of Hormuz, oil prices surged again, and the market immediately shifted to worrying about higher energy costs dragging down the global economy, causing copper prices to fall. The logic behind this is clear: while copper is supported long-term by the frenzy of AI data center construction and the new round of power grid construction, it is still a highly pro-cyclical metal in the short term, and is extremely sensitive to changes in global manufacturing, financing environment, and demand from major countries such as China, Japan, and South Korea. Aluminum tends to trade more on supply shocks and drastic energy cost shocks. In this round of Middle East geopolitical conflict, the direct impact is on the Middle East smelting and logistics chain: the Middle East accounts for about 10% of global primary aluminum production, and aluminum smelting itself is a highly energy-intensive industry, so the risks of a Strait of Hormuz blockade, disrupted shipping, smelter attacks, and force majeure declarations immediately increase concerns about a "break in spot supply". In addition, aluminum, a lightweight industrial metal, has long been seen as a substitute for copper, especially in cost-sensitive, weight-sensitive, and relatively lenient electrical conductivity applications, this substitution trend has been going on for more than a decade and has accelerated in recent years due to resource security and the promotion of new energy industries, but in high-reliability, high-power applications, copper is still irreplaceable. As the LME aluminum price approaches its highest level in four years, and the forward curve switches to a spot premium mode, option implied volatility and European spot premiums are soaring in sync, indicating that the market no longer considers this round of shocks as temporary noise, but as an anticipation of an expanding supply gap and worsening tightness in spot supply. Therefore, JPMorgan defines the current situation as a "critical point driven by tight supply" (supply-driven event horizon). JPMorgan analysts believe that if the production disruptions in the Middle East spread, there is a potential for a rapid impact on the LME international aluminum price reaching $4000 per ton. JPMorgan believes that the danger on the supply side lies in the fact that production cuts have evolved from individual events to chain reactions. Qatalum has initiated controlled production halts, and Hydro, a shareholder of Qatalum smelter in Qatar, estimates that a full restart will take 6 to 12 months; Alba announced that some contracts are force majeure; EGA also confirmed delays in loading and shipping. More importantly, most smelters in the Middle East have aluminum oxide inventories sufficient to last only 20 to 30 days, and shutting down smelters themselves takes several weeks, meaning that more production cuts and even shutdown announcements are likely in the coming weeks. Due to the high dependence of Middle East aluminum smelters on imported aluminum oxide, and with Hormuz also blocking the input of raw materials and the output of finished products, if shipping bottlenecks are not alleviated, the market will face not just short-term delivery delays, but months of production losses and higher costs for resumption.