Iceland Is Currently Benefiting from the War in the Middle East
Iceland, world’s top-ten aluminum producer, is one of the main beneficiaries of Israel and the United States’ war of aggression against Iran. The shutdown of three production lines of the world’s largest aluminum smelter Alba (1.6 million tons per year) in Bahrain led to a sharp rise in global prices for this metal, essential for the global green transition.
Iceland is a major global player in aluminum production, ranking tenth worldwide and producing nearly 900,000 tons annually. Powered entirely by renewable geothermal and hydroelectric energy, the industry is a key economic driver, contributing 325 billion ISK in exports in 2023.
A strong competitive advantage for Iceland as an aluminum producer is that 100 percent of the country’s electricity is generated by hydroelectric and thermal power plants, which has attracted metal producers who seek to lower the carbon footprint of their products by using local renewable energy.
While aluminum is smelted in Iceland, the raw material—alumina—is imported, with the final product primarily exported to the European Economic Area.
The sector provides around 2,000 jobs and significant domestic spending (160 billion ISK in 2023).
The apparent gain for the Icelandic economy from higher aluminum prices could be offset by rising motor fuel prices, which the country is heavily dependent on for air transport—a hub connecting Europe and the Americas—as well as for the fishing industry, a leading manufacturing industry that requires large volumes of diesel fuel.
In the first case, higher airfares could reduce the influx of tourists to the country—another leading industry in Iceland. In the second case, the cost of production and selling prices of fish products would increase, leading to inflation and a loss of competitiveness.
Depending on the duration of the war, which is currently impossible to predict, Iceland will either laugh or cry over its economic consequences.
A Sharp Rise in Aluminum Prices
Guðríður Eldey Arnardóttir is the CEO of Samál, the association of aluminum producers in Iceland.
The world market price of aluminum has not been higher for four years. The CEO of Samál says that the increased income of the Icelandic aluminum plants is reflected in society in one way or another.
The most likely explanation for the increase in aluminum prices, says Guðríður Eldey Arnardóttir, the CEO of Samál, is the situation in the Persian Gulf.
“This region accounts for about nine percent of all aluminum production in the world. Right now, these companies are just uncertain about their resources, both access to electricity and just the transportation of alumina (raw material for aluminum production). So they have just been systematically closing down,” Guðríður says in Sýn’s evening news.
A year ago, a ton of aluminum cost around $2,400 per ton. At the turn of the year, the price exceeded $3,000, last week it exceeded $3,500, and today it is around $3,440 per ton.
The aluminum price over the past twelve months was at its lowest at $2,400 per ton, but last week it exceeded $3,500 per ton.
When looking at the development over the past five years, it is clear that you have to go back four years to find an example of such high prices.
The three aluminum plants in Iceland are each among the largest companies in the country. Together, they create over one-sixth of the national economy’s export value.
“It is simply defined as one of the nation’s basic industries, along with electricity production. Truly, this is an important pillar of the Icelandic economy,” says Guðríður.
But What Is the Significance of the Increase in Aluminum Prices in Iceland?
“The performance of the economy in general always reflects on society. If the performance of the aluminum plants improves, they pay higher taxes.
“It also always reflects on society in some other way. They are then more likely to invest and so on, so of course this is only positive for society as a whole.”
In Iceland, the aluminum plants are among the largest customers of the energy companies, especially Landsvirkjun.
“Now I don’t really comment on the electricity purchases of the aluminum plants. Those contracts are all more or less confidential. But it goes without saying that in cases where electricity contracts are somehow dependent on the world market price of aluminum, this must be positive,” says Guðríður.
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But Is This Just a Temporary Bubble or Should We Expect This to Be a Sustained Increase?
Guðríður says demand for aluminum has been increasing in the world by three to four percent per year.
“And aluminum has just defined itself as a key raw material in the energy transition. So of course that means that while the supply side is not quite following the demand side, it is more of a sign of an increase than the other way around.
“But then it’s just like with the commodity market, there are just unstable prices in commodity markets in general. Sometimes it goes up and sometimes it goes down,” says the CEO of Samál.
Source: Visir (in Icelandic)
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