Heightened geopolitical tensions in the Middle East and attacks on critical energy infrastructure are increasing the risk of a broader economic slowdown, posing near-term downside risks for most industrial metals, analysts at UBS said in a note.
The bank said metals markets have yet to fully price in the potential economic fallout of a prolonged conflict, even as energy prices rise and financial conditions tighten.
“Escalating attacks on energy infrastructure increase the risk of a higher-for-longer energy price scenario resulting in higher inflation and rates that could negatively impact metals demand,” UBS analysts wrote.
While mining equities have already seen some valuation pullback amid broader risk aversion, UBS said most industrial metals (aside from aluminium and thermal coal) remain vulnerable in the near term without de-escalation.
Aluminium stands out as particularly exposed to supply disruptions. The Middle East accounts for a significant share of global production, much of which depends on shipments through the Strait of Hormuz. UBS estimates that about 575,000 tonnes of smelter output have already been curtailed, with further cuts likely if logistical constraints persist.
“Supply is more at risk than demand,” the analysts noted, noting inventories of key inputs such as alumina could be depleted within weeks.
Thermal coal prices, meanwhile, are being driven higher by surging natural gas prices and the risk of supply disruptions. UBS said Asian economies reliant on liquefied natural gas may increasingly turn to coal-fired power, while Europe could also consider restarting dormant coal plants if the energy crisis worsens.
In contrast, copper’s recent rally has been driven more by investor positioning than physical market tightness. UBS noted that global inventories have climbed to multi-year highs and demand remains fragile, even as long-term fundamentals tied to the energy transition remain supportive.
“Near-term demand weakness may push out deficits and elevated inventories will take time to digest,” the bank wrote, adding that it still views price weakness as a long-term buying opportunity.
Gold has also diverged from its traditional role as a safe haven. UBS said rising US real yields and a stronger dollar have outweighed geopolitical risk, pressuring prices despite the conflict.
Still, the bank maintained that gold’s role as a portfolio diversifier remains intact, with recent declines offering an opportunity for investors to build positions.
Iron ore has proven more resilient, supported by higher cost curves linked to rising energy prices and its strong ties to Chinese demand. However, UBS cautioned that underlying fundamentals remain weak, limiting the scope for a sustained rally.
Overall, UBS said that unless tensions ease, the balance of risks for metals and mining equities remains skewed to the downside in the near term, even as longer-term supply constraints and structural demand trends continue to support select commodities.
