Why the Iran war may lead countries to hoard aluminum and copper

Daniel Ghali, director of commodities strategy at TD Securities, joins BNN Bloomberg to discuss how the Mideast crisis exacerbates a metals supply crunch.

The world has been inching closer to a wartime economy over the last year as countries look for resource security, says a Canadian commodity expert.

And the war in Iran only amplifies that, which means governments are prioritizing the stockpiling of critical minerals for industrial use, particularly aluminum and copper, says Daniel Ghali, director of commodities strategy at TD Securities.

“The market is rightly concerned about the prospects for global growth going forward,” says Ghali adding that whether or not the war drags on, it has already incentivized hoarding behaviour.

Copper supply is tighter than it looks

There is growing pressure in copper markets, which are in focus due to global electrification and data centre build-outs, says Ghali.

But he says available inventories that can actually be purchased are at historic lows.

“We have to account for the fact that some of the metal, even sitting in exchange warehouses today, is not actually available for purchase,” says Ghali. The International Energy Agency predicts a 30 per cent copper supply deficit by 2035.

Glali says China dominates the global physical copper supply, holding 40 per cent to 60 per cent of above ground stockpiles.

He also says copper in the United States is landlocked for as long as the threat of tariffs persist.

“Putting all of this together, you come up with what we would say is the unencumbered copper inventories,” says Ghali.

Tariff adjustments help U.S. domestic supply

On Tuesday, the U.S adjusted some of its tariffs on steel, aluminum and copper imports and derivative goods which narrow the penalties on products with lower metal content.

Section 232 tariffs no longer apply to imported goods containing 15 per cent or less steel, aluminum, or copper by weight. Derivative products are now subject to a 25 per cent tariff on the full customs value of the product, rather than just the metal content.

The move is not about easing trade, says Ghali.

“The intent of this policy is to reignite American smelting,” he says as Washington pushes to rebuild its domestic supply.

Ghali says the latest adjustment supports domestic U.S. production by keeping prices elevated through what’s known as the Midwest premium which is the added cost of physical aluminum in the U.S. above global benchmark prices.

“They protected that in this adjustment,” says Ghali.

“They want this price to be higher in order to incentivize new recycling capacity, to incentivize firms to reignite idle smelters, or even to invest in new smelting capacity within the U.S.”

Canada’s manufacturing industry was hit hard by U.S. tariffs on steel, aluminum and autos. The industry lost 51,800 jobs in a year.

Gold buying is down

Gold purchases have dropped, says Ghali.

He says Middle Eastern countries facing a severe economic crisis are prioritizing the U.S. dollar to pay for high energy costs.

“Central Banks and the official sector more broadly, are going to buy slightly less gold than they did previously,” says Ghali.

But that could change. He says the conflict in Iran can either reignite central bank buying activity in gold in a bigger way, or it can continue to result in a fading trend as U.S. dollar reserves come back into focus.