Key Takeaways:
The economic fallout from the eight-week-old war in Iran is shifting from price hikes to production cuts, as sustained high energy costs and supply chain disruptions begin to throttle output in sectors from chemicals to airlines. With Brent crude futures trading above $99 a barrel, companies that once passed on higher costs are now facing margin pressures so severe that reducing operations has become the only viable option.
“The current environment remains challenging with the Middle East conflict exacerbating margin pressure across global refineries,” Alcoa CEO William Oplinger said on the company’s recent earnings call. “Structural dependencies in the Middle East means that disruption there doesn't stay local. It moves quickly through the aluminum value chain, tightening supply, increasing cost volatility and elevating risk well beyond the region itself.”
The market reaction has been swift and unforgiving. Shares of aluminum producer Alcoa (AA) plunged nearly 8 percent after it detailed how the conflict has taken nearly 2 million tonnes of refining capacity offline. Meanwhile, oil prices rose again Wednesday on reports of attacks on container ships in the Strait of Hormuz, with Brent crude climbing 0.7 percent to $99.21 a barrel and West Texas Intermediate rising to $90.26. The pressure was also felt in the industrial and transport sectors, with steel producer Cleveland-Cliffs (CLF) and GE Aerospace (GE) both citing energy costs as a headwind.
The production cuts signal a new, more dangerous phase of the conflict's economic impact. While the initial weeks saw companies raising prices on everything from polyester clothing to plastic toys, the inability to absorb persistently high input costs is now threatening to create supply shortages and further fuel inflation. This follows a pattern seen during the 1973 oil crisis, where an initial price shock was followed by a prolonged period of industrial contraction and stagflation as producers cut output in response to an energy-driven cost squeeze.
Petroleum derivatives are a critical input for more than 6,000 products, and the conflict’s disruption to the Strait of Hormuz—a chokepoint for 20 percent of global oil supplies—is creating widespread consequences. Alcoa noted that the Middle East is a crucial region for alumina, and the conflict has directly impacted supply chains. The impact is tangible for consumers, with reports of shortages of products like Diet Coke in India due to a global crunch in aluminum beverage cans.
The airline industry is also feeling the strain. GE Aerospace, a major jet engine maker, cited geopolitical tensions and rising jet fuel prices as potential headwinds for growth in its latest earnings report, contributing to a 6 percent drop in its stock. United Airlines also highlighted rising fuel costs as a challenge. The Footwear Distributors and Retailers of America estimated that sustained high oil prices could lead to a 1.5 percent to 3 percent increase in shoe prices for shoppers by the fall.
Industrial companies are facing a similar squeeze. Cleveland-Cliffs reported an $80 million headwind on profitability due to a spike in energy prices during the first quarter. For many manufacturers, materials and energy represent a substantial portion of production costs. According to consulting firm Kearney, materials can account for up to 30 percent of the cost to make a simple button-down shirt, a cost that is now rising. One apparel industry executive estimated that polyester materials have seen a price increase from 90 cents to $1.33 per kilogram since the war began.
As the conflict continues with no clear resolution, companies are being forced into difficult decisions, from absorbing costs and squeezing margins to cutting production and raising prices for consumers. The longer the disruptions persist, the greater the risk of a broader economic slowdown as more sectors are forced to scale back activity.
This article is for informational purposes only and does not constitute investment advice.
