If you want to know where to invest during this unsettled period, all we have to do is look at 2022. Back then, Russia invaded Ukraine and set off a massive spike in energy prices. Most investors focus on energy stocks for oil and gas. However, there are second-order impacts that can also make us a lot of money. 

We pointed this out in a December issue of the Daily Reckoning.

Hopping on the Aluminum Train

As we said back then, this train was leaving the station. And it did in a hurry. Here’s a chart of aluminum prices back to 2021:

Congratulations to any of you who jumped on board, because the trend kept rising. When we first wrote about aluminum, we cited Alcoa. At the time, it traded at about $46.44 per share. 

Here’s what the chart looks like now:

As you can see from the chart above, the aluminum price hit its highest level since 2022. And with the current war in Iran, that trend appears set to remain in place. However, analysts at giant investment bank HSBC believe that there’s more going on than just high energy prices.

China’s consumption grew 2.8% year over year, driven by electric grid investment, electric vehicle (EV) demand, and renewable energy growth. The HSBC analysts forecast aluminum demand to grow by another 2% in 2026. 

War and Pieces

The war in the Middle East complicates the global supply/demand situation. Aluminum demand is resilient. It’s a critical building block to global society. However, supply is tight and reliant on energy to produce it. 

Here’s the issue. Aluminum ore is bauxite, a chalky white mineral that’s just aluminum, oxygen, and hydrogen…in other words, aluminum rust. It’s a common enough mineral. The problem is that it takes a ton of energy to break the bond between those atoms. 

It takes about 51,600 kWh of electricity to produce a ton of cast aluminum from bauxite ore. That’s enough energy to power a typical American home for nearly five years! That’s why the Middle East has so many aluminum smelters. It’s cheaper to ship ore there and cast metal out.

The Middle East produces 9% of the global aluminum supply. For example, Aluminum Bahrain (ALBA) is the world’s largest single-site smelter. It officially suspended 19% of its production because it couldn’t ship through the Strait of Hormuz. And aluminum smelters in Qatar also shut down due to damage to their natural gas production. 

And as supply gets low, producers must react. India’s Hindalco suspended sales of extruded products.

That’s why this war sets up a scenario where aluminum prices go higher for longer.

However, some folks will want to short producers when the war eases. They will see the end of the war as a simple resumption of business as usual. But we don’t believe that’s the case.

Smelters are difficult to turn off and on again. And as long as they are off, the world consumes the remaining supplies. We look to the past to help us understand the future.

History as Teacher 

In 2022, aluminum hit $3,500 per metric ton. And that was just due to high energy prices. The current war is doing massive structural damage to global energy infrastructure.

In 2008, aluminum hit $3,000 per metric ton. Adjusted for inflation, that’s $4,500 per metric ton today. That’s probably a realistic expectation for the current trend. To put that in perspective, we need to use the Dow Jones U.S. Aluminum Index:

This index tracks companies that produce, smelt, and process aluminum. Today, the index value is 222.7. At its peak in 2008, the index was one hundred points higher than that. 

Wrap Up

We won’t understand the disruption to the world’s energy system for months (or years). However, it will be worse than most people think. And that will impact the price of aluminum, due to its high energy needs.