Israel-Palestine conflict: No immediate impact on steel, energy. But, future uncertain?

• Several Arab countries show solidarity with Palestine
  
  
• Crude oil disruptions expected if conflict escalates
  
  
• Inflation fears may return if energy prices rise
  
  

Morning Brief: In the wee hours of 7 October, as thousands of youngsters gathered to attend a music fest in southern Israel, Hamas terrorists, in a sudden ambush, gunned down several hundred at the scene itself, launched rocket attacks, took hostage of countless many and cut off the entire area to prevent escape. It is said to be the boldest and most sophisticated of attacks from this Palestinian extremist outfit.

The attack was the latest trigger in a conflict whose history can be traced back to the Biblical times and whose seeds are sown in a righteous demand for land, statehood and self-rule with global nation states divided in their support of the cause.

In more recent times, from 1948 onwards, the conflict gained momentum as it drew ammunition from the rise of nationalist movements among both the Jews and Arabs.

Post-the latest attack, as global leaders huddled to find ways to denounce and de-escalate the crisis, economy watchers resorted to crystal gazing to gauge a possible impact on global trade amid mounting fears that the war could be here for the long haul.

While there are no indications of any immediate effect of the Israel-Hamas war, a more severe worry is snowballing in the form of the countries coming out in support of Hamas.

Impact on steel

There is not likely to be a major steel supply disruption as things stand now. Both Israel and Palestine are geographically small entities, and neither is a steel producer or exporter. Israel is import-dependent and buys over 2 million tonnes (mnt) of all finished steel products. The main exporter to Israel is Turkiye, because of its geographical proximity, and China, Russia, Spain etc to a small extent. So far, there has been no impact on the steel trade between Israel and these countries. A source observed to SteelMint: "This is not likely to be impacted unless logistics are severely damaged. But such signs are not visible as of now." Another possible worry could be Turkiye's future stand as it has indicated it is prepared to send humanitarian aid to Palestine hit by the conflict but which is hard to deliver under the present circumstances without elaborating. Israel, on its part, has vowed to annihilate Hamas.

Iran, an exporter of considerable volumes of steel, has been vocal in siding with Hamas.

In the first six months of the current Persian Year, Iran's finished steel exports stood at 1.53 mnt, showing an 8% growth y-o-y, as per data from the Iranian Steel Producers Association. Iran mainly exports to a few Southeast Asian countries and this trade flow may remain undisrupted. However, the equation may change subsequently if a few other Arab steel producing and exporting countries like Egypt and Algeria joint the war. "In such an event taking place, there would be a major fallout on energy prices and the steel trade," the source told SteelMint.

Crude and energy worries

What makes this piece of ongoing conflict fraught with alarm is that more than 30% of the global crude oil production is concentrated in the Middle East.

While Iran's support alone may not have been of very high concern, the fact that other Arab states have shown solidarity with Palestinians is to be factored in. These include Egypt, Algeria, Bahrain, Morocco, Turkiye, Yemen, Tunisia and Kuwait.

Global organizations are concerned over the possible impact, even if not immediate, on crude oil and energy prices, as the Arab world thronged in support of Hamas.

The International Energy Agency, in its latest monthly oil market report, said, while the Israel-Hamas war had not yet had a direct impact on physical supply, oil markets would "remain on tenterhooks" as the crisis unfolds.

"The Middle East conflict is fraught with uncertainty and events are fast developing," the IEA said in its report.

Investors are closely monitoring the potential for output disruptions in the Middle East.

The IEA further noted that the Middle East accounts for more than one third of the global seaborne oil trade, and the Israel-Hamas conflict has ratcheted up fears that regional energy production may be affected.

A disruption in crude oil and energy supply would again lead to spiraling energy prices which had eased a bit and given economies a breather. On 1 July, 2023, the energy price cap dropped to ILS 1,976 and fell further on 1 October, 2023 to ILS 1,834, but it is still significantly higher than what it was in late 2021 before the energy crisis hit. The benchmark WTI crude oil has fallen off from the May 2022 levels of $121/barrel to $83/barrel.

"If crude price rises then the freight component will increase. Otherwise, I do not see any other major impact - unless, the Suez Canal shuts down, which is quite a distance from Israel," said a source.

Outlook

Higher oil and energy prices will inevitably raise costs of goods and services and lead to widespread inflation.

The International Monetary Fund has already sounded the alarm bell that the Israel-Hamas war could spur inflation and hamper global growth if it turns into a wider conflict that causes a significant increase in oil prices.

Gita Gopinath, IMF First Deputy Managing Director, in an interview to Bloomberg, said, that a 10% increase in oil prices leads to inflation being 0.4 percentage points higher a year later. Under that scenario, global output falls by 0.15 percentage point. That would add to an already difficult environment for inflation and growth that is challenging central banks.

Further inflationary pressures would have an eventual negative impact on all commodities, including steel, as end-users see an inevitable dip in consumption.