How is the Iran conflict impacting energy-transition materials?

The Iran conflict and de facto closure of the Strait of Hormuz has thrust energy security back into the global spotlight. While the initial focus inevitably fell on oil and gas, this is not simply a fossil-fuel issue: the disruption to supply chains impacts a range of other commodities, including materials essential to the energy and technological transition. 

Short-term volatility is likely to persist across commodities markets as long as the geopolitical crisis remains unresolved. However, the long-term consequences of the conflict for transition materials will almost certainly be positive, in our view, as their strategic value is emphasised.

A short-lived conflict would exert narrow, short-term impacts

If, as at the time of writing, US President Donald Trump continues to predict, the effects of the war are unlikely to be long-lasting, markets may experience one-to-two quarters of ongoing tightness in oil and gas supply. This would support elevated prices in the near term before conditions gradually normalise. Absent other factors, prices may eventually return to previous levels. Alternatively, they may settle at a slightly higher level, particularly if fossil-fuel importers such as Europe and China accelerate purchases to rebuild their strategic reserves.
 

Read also: Finding signals in the noise of the Iran oil shock

A longer term war would impact a wider range of commodities

If, on the other hand, the conflict turns into an extended war, the repercussions could affect the entire commodities spectrum. While lower global oil and gas supply would remain the headline issue, the impact on supply chains for a range of other essential raw materials would become a growing problem. 

Along with around a third of global fertiliser shipments, as much as 50% of the world’s sulphur exports pass through the Strait of Hormuz¹. Sulphur is essential for producing sulphuric acid, which aside from being a key ingredient in fertiliser production, is required in the refining of metals including the copper, nickel and zinc essential for the energy transition. 

Constrained shipments through the Strait would therefore meaningfully disrupt supply, driving up production costs across multiple commodity categories and resulting in higher market prices.

A more complex scenario for precious metals

While transition metals would experience upward price pressures, precious metals, notably gold, could face a more mixed environment. Contrary to its status as a safe-haven asset, gold experienced its biggest weekly drop in value in decades during mid-March, down 20% from a late-January peak². While ongoing safe-haven demand is likely to make this more of a temporary correction than a broader trend reversal, higher rate expectations and a stronger US dollar would stymie gold prices.
 

The price of fossil fuels continues to be the key barometer

While a range of commodities could feel the impact of the conflict, fossil-fuel energy prices will be the critical variable to keep watching. Oil prices have demonstrated significant volatility since the start of the crisis, with Brent crude surging past USD 120 per barrel before falling back on mixed news about negotiations². Currently, we see this short-term volatility as a risk to be hedged, but this view could change if the conflict extends in duration or intensity.

A global recession is not currently the most likely scenario. However, if oil prices remain elevated for an extended period, the mechanical risk of recession inevitably increases. Exactly where that level sits is difficult to assess; however, analysis published by Oxford Economics suggests that if prices were to hit USD 140 and persist for more than two months, parts of the global economy would indeed fall into recession.³

Expect long-term upside for transition materials

Ultimately, regardless of the duration of the conflict, transition materials stand to benefit once geopolitical tensions ease. The oil and gas market shock precipitated by the Russian invasion of Ukraine in 2022 had already pushed the issue of energy security high up the agenda for governments. The Iran situation further emphasise the need for diversified energy supply – which will almost inevitably benefit renewables and electrification.

Prices for transition materials are likely to rise as major countries seek to expand their strategic stockpiling programmes, providing structural support and a positive outlook for the asset class and thematic, in our view. We therefore maintain a constructive long-term view for our Transition Materials strategy, particularly as a diversifier from oil and gas.