UBS: Middle East supply risk pushing up aluminum and thermal coal prices, raising our forecast for this year by 13% and 10% respectively.

UBS released a research report stating that the recent supply risks in the Middle East have pushed up international aluminum and thermal coal prices, indicating that after oil and natural gas, aluminum and thermal coal are the commodities most affected by the Middle East conflicts. The bank pointed out that thermal coal is supported by the substitution effect of natural gas to coal, and the short-term energy price risk premium may persist, driving up coal prices. As for aluminum, supply disruptions in the Middle East and rising energy costs are pushing up cost curves. Approximately 650,000 tons of aluminum supply have already been interrupted, and if shipping in the Strait of Hormuz continues to be disrupted for several weeks, it may lead to the closure of around 4 million tons of smelting capacity, increasing the short-term upward risk for aluminum prices. The bank has raised its short-term price forecasts for aluminum and thermal coal to reflect the supply risks and rising energy prices brought about by the conflicts in the Middle East. The bank has raised its 2026 LME aluminum price forecast by 13% to around $3,250 per ton, while keeping its 2027 forecast unchanged at $3,300 per ton. In the European and American markets, Middle Eastern supplies account for about a quarter of imports, and if disrupted, may drive up aluminum premiums in Europe and America. On the thermal coal front, since the outbreak of the conflict in Iran, European natural gas prices have risen by about 50%, Brent crude oil prices by about 30%, and Newcastle port (NEWC) thermal coal prices by about 15%. The high natural gas prices support coal prices, and the bank has raised its 2026 NEWC thermal coal price forecast by 10%, from $115 per ton to $126 per ton. Although large-scale natural gas to coal conversion is not expected in the short term, if energy prices remain high, coal demand may increase. The bank's medium-term outlook remains unchanged, expecting demand to decline, causing coal prices to fall back to near the cost curve, around $100 per ton. UBS pointed out that if the continued conflicts in the Middle East lead to a significant increase in energy prices (and affect inflation/interest rates), it will pose downside risks to global economic growth, industrial production, and metal demand. However, the bank notes that many factors related to end-demand that are closely tied to the economy have long been weak, reducing downside risks; at the same time, demand for energy transition may be supported by high energy prices.