Industrial metals tumbled, with aluminum sliding the most since 2022, as the worsening war in the Middle East pushed energy prices higher and increased the risk of damage to the global economy.
Copper slumped 2% in London, giving up its gains for this year, while aluminum sank 4.4% The rout came as escalating attacks in the Persian Gulf threatened long-term damage to major energy facilities, boosting European natural gas and Brent oil prices.
Speaking at the White House, President Donald Trump said he’s not putting troops anywhere, when asked about sending ground forces to the Middle East. Meanwhile, Treasury Secretary Scott Bessent said it’s likely Iran’s regime will probably collapse within itself.
With no resolution to the war in sight and energy prices soaring, risk assets including industrial metals are coming under severe selling pressure. Costlier energy make metals more expensive to produce and fuels inflation, which could prompt central banks to raise interest rates and make non-yielding assets like metals less attractive.
“It seems that the price action today has been largely driven by risk-off sentiment and macroeconomic growth concerns, which has resulted in a selloff across both base and precious metals,” said Jason Ying, a commodity strategist at BNP Paribas SA.
Copper, which started this year in bullish form and reached an all-time high in late January, has shed about 9% this month on the London Metal Exchange.
The Federal Reserve’s latest policy meeting fanned worries about the trajectory for interest rates. While the bank left rates unchanged for a second straight meeting, Chair Jerome Powell’s commentary dwelled on signs that inflationary pressures were still lingering even before the Iran war erupted. Concern is mounting that central banks will be forced to tighten policy to keep inflation in check, which could curb demand for metals.
“With oil prices now rapidly rising, the macro scene is looking bleak. We could end up in stagflation,” said Bernard Dahdah, an analyst at Natixis. “The implication is also that central banks need to raise rates to battle inflation and that the Fed won’t be able to cut rates in June. Higher rates would increase the cost of funding for metals.”
Conflict Impact
Metals traders are weighing the potential for supply disruptions — especially in the aluminum market — against the threat to manufacturing activity worldwide if the conflict triggers a broader economic slowdown. Chinese metals demand was already soft before the US and Israel attacked Iran.
However, the metals rout might also help to stimulate some buying, especially among Chinese consumers who had balked at high prices earlier this year. Stockpiles of aluminum and copper in China had surged.
“After prices fell, expectations for consumption in China have improved quite a bit, which is also helpful for inventory drawdowns going forward,” said Wu Kunjin, head of base metals research at Minmetals Futures Co.
Aluminum Gamma Squeeze
Aluminum was hit particularly hard in the price rout on Thursday, with prices plunging the most in nearly eight years at one point. Its trading volumes surged to a record high in the LME’s electronic market.
Some dealers noted that the rapid unwinding of hedges against a massive bullish options trade could have contributed to aluminum’s outsized losses.
LME dealers were shocked last month by the appearance of a huge call spread targeting a price between $3,300 and $3,500 a ton in April-expiry contracts. The trade came into the money as prices spiked in the early stages of the Iran conflict. Dealers said the aluminum position was large enough to fuel a so-called gamma squeeze, where dealers end up driving prices higher as they race to buy futures as a hedge against options they’ve sold.
In turn, that process may have gone into reverse as the options rapidly moved out of the money on Thursday, dealers in the LME market said.
“I’m sure the move to the lows must have been exacerbated by short gamma exposure around the $3,300 level,” said Al Munro, senior base metals strategist at Marex, one of the biggest dealers on the LME. “But we’re also in an environment where many risk managers are clearing the decks, whether in precious or base metals.”
Thursday’s rout is a whipsawing reversal for aluminum traders, following on from a sharp rally seen as the burgeoning conflict in Middle East throttled supplies across the region. While copper has slumped as investors have weighed the war’s worsening impact on the global economy, many traders have been warning that widespread smelter curtailments in the region could drive prices sharply higher.
Aluminum fell 4.4% to settle at $3,252 a ton, although it’s still up more than 8% this year. Among other base metals, tin was down 3.4% and nickel declined 1%.
Written by: Bloomberg News
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