CONSUMER BUYING PRICES

In the March Market Insights, I asked, “Will Iran’s economic leverage trump U.S. military power?” During the past 40 days, the Strait of Hormuz was virtually closed setting off a choke point of reducing the oil supply chain that impacted the global economy. Iran attacked energy supplies - oil, natural gas and electric - of its Gulf neighbor states. It also struck hotels and entertainment areas, destroying the image of that area being safe for travel. Meanwhile, the price of oil soared to over $100 a barrel.

The U.S. and Iran agreed on Tuesday to a two week cease fire in exchange for Tehran reopening the Strait of Hormuz. This is much to the relief of the world but only after the inevitable death and destruction of war. Trump said the U.S. will help ease traffic through the waterway, with more than 800 vessels caught in the Persian Gulf.

“You can never make a good deal with a bad person.” Warren Buffett. He emphasizes the need for three traits to make a deal work: intelligence, energy and integrity. This also applies to U.S. - Iran cease fire deal. In the Mideast, all deals are VUCA - volatile, uncertain, complex and ambiguous.

The cease fire is not a peace plan. The war started as a way to stop Iran’s nuclear program. Iran was able to outmaneuver and alter the course. Hormuz became the defining issue of the war and Iran regained the leverage to hold the world in an economic straight jacket.

The U.S. - Iran negotiations will go on for a long time. They will not go smoothly, and there will be more disruptions, keeping the clash in the current news for the foreseeable future. Hopefully, we won’t get back to a war, although I am sure there will be continued threats and breaking news to disrupt our sleep.

This is not over, and we have not seen an end to the negotiations. China has a vested interest in energy supplies from Iran and Iran needs China for weapons. China’s long-term strategy to take over Taiwan will influence what happens in Iran.

A concern for our manufacturing base is the Iranian attack on the aluminum production in the Gulf states. Missiles struck aluminum smelters in Abu Dhabi and Bahrain late last month, sidelining roughly 3 million tons of production which will be covered in the Metals section below.

The original question, “Will Iran’s economic leverage trump U.S. military power?” The answer is yes. Iran’s economic leverage proved to be greater than U.S. military power. Iran has proven it is capable of disrupting the world’s economy even though most of its military was destroyed.

While a portion of VUCA - VOLATILITY, UNCERTAINTAY, COMPLEXITY AND AMBIGUITY has been reduced, we will continue to face the economic effects of this war.

INFLATION

Inflation is picking up for March

• The Consumer Price Index (CPI) for March rose 0.9% in line with expectations due to the higher oil prices, and 3.3% on an annual basis. Core CPI was not as bad and was up 0.2% month over month and up 2.6% on an annual basis.
• Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure, rose to 0.4% for February from 0.3% in January, the latest data out. The annual rate was 2.8%, which was the same as January. The core rate for February was 0.4%, the same as it was for the last three months. The annual core rate dropped to 3.0% from 3.1% the previous month. This data is pre the U.S. - Iran war.
• The Producer Price Index for February final demand rose by 0.7% marking a 3.4% annual increase, the largest annual advance since February 2025. This was driven by rising energy and service costs, which exceeded projections. Core PPI demand, less food, energy and trade, increased 0.5% in February, following a 0.8% increase in January, representing a 3.5% gain year-over-year. This is signaling high inflationary pressure.

MANUFACTURING

Mainly positive news despite the Iran war

• The Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) continued to rise in March to 52.7 versus 52.4 in February. The bad news is that all commodity prices surveyed hit 78.3 up from February’s 70.5 and the highest reading since 2022.
• The major measures of activity were mixed. The index for new orders declined to 53.5 from 55.8, while the production index increased to 55.1 from 53.5. However, both remain in solid expansion territory, signaling growth.
• The other good news is that the order backlogs started growing again this year, with the index sitting at 54.4 in March, now the third consecutive month in expansion territory. Prior to this, it had contracted for 39 straight months going back to September 2022. Despite signs of improving demand, employment remains below 50.
• The survey also showed that the change in tariffs has helped but that the Iran war continues to create uncertainty over prices and supply chain.

Here is the other important manufacturing data affecting our industry.

• Core industrial production, which excludes volatile autos, posted a modest gain in February, rising for the fourth consecutive month to hit a new post-COVID high. It is up 2.5% since January 2025, despite huge shifts in trade policy and tariff uncertainty.
• Core manufacturing also posted a gain of 0.1% and is up 2.6% on an annual basis. The typical bright spots in the “core” measure were present in today’s report as well. Production in high-tech equipment, which has been a reliable tailwind recently due to investment in AI as well as the reshoring of semiconductor production, increased 0.7% in February. High-tech manufacturing is up a strong 8.6% in the past year, the fastest 12-month growth rate of any category. In addition, the manufacturing of business equipment was up 6.3% in the past year, signaling reindustrialization in the U.S. outside of just the high-tech industries mentioned above. These numbers are a clear indication there is a new upward trend emerging.
• U.S. non-defense capital goods new orders, excluding aircraft, rose 0.8% in February, after a downwardly revised drop of 0.4% in January. This is also a 6.0% increase over the past year, the largest annual gain since 2022. The increase in these orders was led by primary metals (+2.2%), industrial machinery (+1.5%), and fabricated metal products (+0.5%).
• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, rose 0.9% in February. If unchanged in March, core shipments would rise at a 5.3% annualized rate in Q1 versus the Q4 average Business investment has shown strength recently as core shipments have consistently risen since mid-2025, which is a good sign for manufacturing. We will see what happens with the post Iran war data.
• The National Federation of Independent Business fell in March to 101.6 from 103.5. Despite this decrease, the index remains above the 2025 average.
• Employment rose in March by 178,000 after dropping by 133,000 in February. Most of the jobs were added in the service industry and only 15,000 jobs were added in manufacturing. The unemployment rate dropped to 4.3%, but that was due to 400,000 people dropping out of the labor market.
• Construction spending declined 0.3% in January, as drops in homebuilding and manufacturing construction fully offset a large increase for highway & street projects.
• Car and light truck sales for March rose to a seasonally adjusted annual rate of 16.3 million units up from 15.8 million in February. This was down 8.7% year over year.
• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our nine locations and a diverse industrial base. Based on our twelve-month trailing average, volumes for March fell 10%.

CHINA

U.S. - Iran War impact on China

The Strait of Hormuz issues are also affecting China who is heavily dependent on its oil and gas needs and imports 74% of its total demand. The U.S. imports only 35% of its oil needs and actually exports oil.

China’s main vulnerabilities are the concentration of oil imports from the Middle East and the chokepoint risk of the Strait of Hormuz. About 90% of the oil and 83% of the liquefied natural gas that normally pass through the Strait of Hormuz are bound for Asia, making the region uniquely dependent on energy flowing through the strait. However, China has approximately a 4-month stockpile of oil and gas.

China has developed a long-term strategy to reduce its energy dependency by being the leading producer of renewable energy in the world. It has diversified from coal to hydro, solar and wind power for its energy sources. Renewable energy surpassed oil in 2024 to become China's second-largest energy source, after coal. EV cars have made up more than 50% of all new car sales for close to a year. As the saying goes, the cure for high prices is high prices.

China is also a beneficiary of the attacks on the Gulf States aluminum producers.

• Chinese aluminum producers will benefit from a rerouting of raw materials away from the Middle East due to the U.S.-Israeli war with Iran.
• The war has propelled prices of aluminum to near four-year highs and lifted Chinese margins to record levels, with China being an obvious destination for marooned cargoes.
• Total Chinese imports of alumina are estimated to climb to 280,000 tons in April, with net imports rising to a two-year high of 90,000 tons.
• Meanwhile, in March, China's factory activity grew at its fastest pace in close to a year, with the official manufacturing PMI rising to 50.4 from 49.0 in February. However, the sub-index for raw material input prices jumped to 63.9 from 54.8, driven by rising commodity prices and stronger procurement demands by customers. A private gauge of China’s manufacturing activity, the RatingDog PMI, eased to 50.8 in March from a five-year high of 52.1 in February.

METALS

Lookout ahead

With the start of the war, oil rose and kept rising as the war escalated and the Strait of Hormuz was virtually shut down. However, no one anticipated that Iran would attack its neighbors and their economies.

Here we are, and it is a hot mess. At the start of the war, the Gulf states primary aluminum producers reduced production due to the supply chain squeeze surrounding the Strait of Hormuz. At the end of March, Iran brought direct air strikes on Bahrain smelter Alba and the giant Al Taweelah smelter own by Emirates Global Aluminum. Alba is down 30% and Al Taweelah is completely out of action after damage to its power plant, according to consultancy Wood Mackenzie and is expected to be down 12 months.

So far, estimates are that the loss of aluminum production will be between 1.8 and 3 million metric tons this year. This will put the world into a sizable deficit. Harbor is estimating the 2026 deficit to be 1.4 million metric tons, the greatest in 31 years based on weeks of supply. Harbor also states that the U.S. is in a better position to withstand this deficit because it has 350k mtpy of secondary and primary billet/slab capacity available to support the Middle East disruption. Also, the U.S. is the most profitable market to ship aluminum into because of the high premiums here.

On March 27th, prior to the missile and drone attacks on the aluminum plants, spot prime was $2.58. Since then spot has risen to $2.76 with LME up $300 per metric ton and the Midwest premium up about 7 cents.

The good news is metal will be available here, but at much higher prices. These higher prices will cause demand for some manufactured goods to slow down and possibly some demand destruction. How long this continues and how much worse this will become is unknown. This brings to mind, one of my favorite cartoons “Lookout Ahead” by Gary Larson. Nothing sums up the aluminum market or what’s going on in Iran like this cartoon.

Despite the higher prime aluminum prices, scrap prices continue to lag behind the market. Prime grades are up about $.05 per pound and secondary grades are up a few cents. Copper prices fell about 5%. Stainless steel prices rose a few cents while scrap steel was unchanged.

CLOSING

Over my fifty plus years in this business, I have learned and accepted that everything changes. However, I have never seen the enormity and rapidity of the changes we are experiencing now. The phrases “not in my lifetime” and “unprecedented” have become a part of my everyday conversation.

"If you fail to plan, you are planning to fail." - Benjamin Franklin