As the market’s assessment of geopolitical risks in the Middle East tends to ease, international aluminum prices have experienced a significant pullback this week. Analysts from Sukdun Financial pointed out that in the base metal sector, aluminum has been most deeply affected by geopolitical conflict narratives due to its highly concentrated smelting capacity in the Gulf region and reliance on key maritime trade routes in the Strait of Hormuz. Therefore, with the substantial easing of supply concerns, there has been a large-scale liquidation of long positions and a sharp increase in trading volume. In early trading in the European market, the three-month aluminum futures price on the London Metal Exchange (LME) fell 0.8% to $3356.50 per ton, and the cumulative decline this week has expanded to 5%.

The ‘war premium’ of aluminum is being exposed by reality

The recent decline in aluminum prices appears to be a reversal of emotions brought about by progress in the US Iran agreement, but the underlying logic is the market’s repricing of the “supply shock” narrative.

Aluminum is the most expensive variety in this round of geopolitical conflicts. The Gulf region gathers about 10% of the world’s electrolytic aluminum production capacity, and coupled with the shipping lifeline of the Strait of Hormuz, aluminum prices have previously enjoyed generous “war surcharges”. But when the agreement signal appears, this premium becomes the first foam to be squeezed out. This week’s cumulative decline of 5% indicates that the market is rapidly digesting the expectation of “uninterrupted supply”.

The large-scale liquidation of long positions reveals an awkward fact: the previous rise was more driven by emotions rather than the real supply-demand gap. The global aluminum market is already facing dual pressures of overcapacity and weak demand, with weak economic recovery in Europe and continued bottoming out of Chinese real estate demand. After the geopolitical premium recedes, aluminum prices will once again face fundamentals – which are not optimistic.

This callback may not have ended yet. If the US Iran agreement is finally implemented, the expectation of Iranian crude oil and aluminum ingots returning to the international market will further suppress prices. The support level of $3200/ton below LME aluminum prices may face a test.

For investors, this is a warning: in geopolitical trading, it is not only important to buy against “conflicts”, but also to know how to exit in a timely manner before “peace” arrives. The lesson of aluminum prices is that the premium comes as quickly as it goes.