Middle East turmoil caps base metals despite tight supply

Base metals closed a volatile week with mixed results, caught between tightening physical supply and mounting geopolitical risks. Copper edged up 0.3% to $13,636 a ton on the London Metal Exchange by early afternoon, while aluminum dropped 1% and zinc fell 0.5%.

The cautious trading environment follows recent attacks on commercial vessels in the Red Sea by Iran-backed Houthi rebels. The widening regional conflict briefly pushed Brent crude back above $100 a barrel, reviving market fears that surging energy costs could reignite global inflation. That dynamic threatens to force central banks to maintain or even raise interest rates, dampening economic activity.

“The metals complex has been relatively weak in July as ongoing military skirmishes in the Middle East generate fresh uncertainty for the global economy,” analysts at BMI, a unit of Fitch Solutions, wrote in a recent note. The firm pointed out that this geopolitical premium has specifically reduced the prospect of near-term rate cuts. Furthermore, it raises the risk of a stronger US dollar and elevated bond yields, both of which act as traditional headwinds for dollar-priced industrial commodities.

Despite these macroeconomic constraints, traders are hesitant to aggressively short the market because physical demand continues to outpace available supply. Copper remains a standout, holding onto a roughly 10% gain for the year. This resilience is largely driven by robust consumer demand pulling significant stockpiles out of London and into the US, compounded by localized supply pressures within China. The metal's strength was evident earlier in the week when it approached the $14,000-a-ton threshold.

Looking ahead, the copper market is also navigating significant regulatory uncertainty. Investors are closely monitoring whether the Trump administration will impose new import levies on the metal. The US Department of Commerce was expected to deliver its tariff recommendations to the president more than three weeks ago, but a final decision has not yet been made public.

While aluminum and zinc are still on track to post weekly gains, the overarching mood among institutional investors remains guarded. Until the geopolitical picture clarifies or central banks signal definitive policy shifts, the base metals sector will likely continue to trade within a tight, volatile range.