Buyers of electric vehicles and consumers of a diet cola in India may seem to be two groups with little in common, but they are both at risk from the fallout from the ongoing closure of the Strait of Hormuz.
The longer the narrow waterway remains closed to most vessels the more pronounced second- and third-round effects will become on the world economy, which is already having to deal with higher prices for refined fuels such as diesel and gasoline and the related inflation this brings.
Electric vehicles (EVs) are widely considered to be one of the big winners from the current conflict between the United States and Iran, as they allow users to move away from reliance on fossil fuels.
But EVs are exposed to the Strait of Hormuz as the manufacture of their batteries is dependent on sulphuric acid, a key component in the extraction of metals such as nickel and lithium.
Sulphuric acid is vital in the high-pressure acid leach method of extracting battery-grade nickel from ore at mines in Indonesia, the top producer of the metal.
It is also used to extract lithium from hard rocks in Australia, the biggest producer of the metal, and is also important to produce copper.
Prior to the February 28 U.S. and Israeli attack on Iran about half of global seaborne sulphur went through the Strait of Hormuz, largely to countries in Asia.
Sulphur is a by-product of producing crude oil and gas, and refining into fuels, making Middle East countries such as the United Arab Emirates and Saudi Arabia major suppliers of the raw material that is used to make sulphuric acid.
Sulphur is usually transported by bulk carriers and volumes through the Strait of Hormuz have collapsed since the start of the Iran conflict, with data from commodity analysts Kpler showing only 30,000 metric tons made it out in April and 180,000 tons in March.
This was down from an average of 1.27 million tons a month in the three months prior to the start of the conflict, according to Kpler.
The loss of Middle East cargoes has sent the price of sulphur soaring, with delivered prices to Asia reaching as high as $880 a ton, up 50% since the start of the war.
The higher price for sulphur is feeding through to sulphuric acid and will raise costs for nickel, copper and lithium miners, but of more concern is that supply might be constrained.
If miners in Indonesia, Australia and Chile are forced to compete with each for supplies, it raises the risk that some may be forced to curtail production if they are unable to obtain enough sulphuric acid.
RISING CONCERN
Several mining executives from Indonesia and Australia attending last month’s Asian Battery Raw Materials Conference in Hanoi expressed concern that securing sulphuric acid supplies on a medium-term basis is becoming more challenging.
China’s EV and battery storage makers are exposed to any loss of supply of nickel produced using HPAL as well as lithium from Australia.
There are some alternatives to using sulphuric acid in processing metals, but they are not suitable to produce battery-grade nickel, and for copper and lithium they require higher energy inputs to make lower volumes.
While the processing of metals is not yet a crisis point, the longer the Strait of Hormuz remains effectively closed the closer that point becomes.
It raises the question as to what tactics Beijing will follow if a threat to its EV and battery industries becomes more than just a remote possibility.
The logical step would be to up the pressure on both its ally Iran and on U.S. President Donald Trump to reach an agreement that at the very least reopens the Strait of Hormuz to all traffic.
While the threat to the production of battery metals increases, there are other impacts outside of crude oil and LNG already being felt.
About 8% of global aluminium supply went through the Strait of Hormuz prior to the Iran war, and this has largely stopped.
About 20,000 tons of the lightweight metal exited the Strait in April, according to Kpler data, down from an average of 1.26 million tons in the three months prior to the start of the war.
The loss of these cargoes has tightened aluminium supply in India, leading to a shortage of Diet Coke, which is only sold in aluminium cans.
While this represents an inconvenience for Diet Coke drinkers, it also shows that shortages turn up in unexpected places and will disrupt supply chains, leading to higher prices and changed consumer behaviour.
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The views expressed here are those of the author, a columnist for Reuters.
(Editing by Jacqueline Wong)