War in Iran: Industry and Agriculture Strained

The macro point

We are increasingly perceiving the real economic impact of the war in Iran. Initially, oil was on everyone's lips due to the strategic importance of the Strait of Hormuz. But it's not the only commodity affected. The Gulf region represents a substantial share of the global production of fertilizers, petrochemicals, industrial gases, and essential raw materials for industry. Take urea and ammonia used in agriculture. They account for 35% and 45% of global supply, respectively. Their prices have increased by an average of 20-25% since the conflict began. This rise is already affecting cereals. And this is certainly just the beginning!

The observation is similar for petrochemical raw materials. The Gulf produces about 35% of the world's methanol and is a major player in the production of polyethylene and polypropylene, which are key components for packaging, consumer goods, automotive parts, and electrical insulation. They are used everywhere, in industry in Asia, Europe, and the United States. It's the same for sulfuric acid. It's the most manufactured chemical in the world that uses oil as its main raw material. It's a market growing at 4-6% per year due to the expansion of industrial chemistry, the greening of our economies, and soaring demand for metal processing. Without sulfuric acid, there's no way to extract copper and cobalt. It's impossible to manufacture transformers, electric vehicle batteries, or substrates for all data centers on the planet. The problem is that its main producer is Saudi Aramco, whose production transits through the Strait of Hormuz.

Metals and mineral inputs are also directly affected by the war in Iran. The Gulf produces significant volumes of sulfur, which is widely used in fertilizer production and metal processing, and also contributes to the global supply of aluminum, particularly outside of China.

The consequences of the conflict go far beyond oil and concern the entire industry and agriculture on a global scale. Some regions are obviously more exposed than others, particularly Europe and Southeast Asia. But no country will escape supply disruptions and soaring prices. For now, apart from fuel prices and airfares that have started to increase, the end consumer remains unaffected. Not for long. It is likely that industrialists, who cannot indefinitely cut their margins, will begin to pass on the increases as early as the beginning of summer. This will certainly be more brutal than in 2022 during the Ukraine war. Three major differences:

• There is no longer extra savings linked to Covid. In countries where the savings rate is still high, like France, it is mainly in the hands of a handful of wealthy households. They are, of course, able to cope with a rise in food and industrial goods prices.


• The job market is not tight. On the contrary, it shows signs of slowing in several countries, especially in the United Kingdom and the United States. This means we shouldn't count too much on wage increases to partially offset the resurgence of inflation.


• States have depleted public finances. Certainly, the European Commission has already called to implement subsidies for the most vulnerable and to block price increases where possible, especially for gasoline. But we must be objective, a country like France has little leeway to implement support measures for industries and households. Moreover, borrowing costs on European countries' financial markets have continued to rise since the conflict began. This is unusual. During times of geopolitical risk increase, it tends to decrease because sovereign bonds are perceived as safe havens. This is not a good sign.

Technical point

On the foreign exchange market, the Reserve Bank of Australia increased its key rates by 25 basis points, to 4.1%. More are to come according to its statement. This has helped support the Australian dollar, which has performed very well since the conflict began: +3% against the EUR and +0.5% against the USD.

Unsurprisingly, the US dollar continues to benefit from its role as a crucial safe haven in times of rising geopolitical risk and falling liquidity in financial markets. In a month, the currency has gained 2.5% against the euro. This should continue as long as the conflict in Iran is not resolved.

Normally, everything should be in favor of the Japanese yen. Geopolitics is playing its role, volatility is abnormally high on stocks while liquidity on the American stock market has collapsed. Yet, the yen remains close to its historical lows. Based on the real effective exchange rate, it has never been so weak. This is certainly related to questions surrounding the short-term evolution of Japanese monetary policy.

Announcements to follow

Unsurprisingly, the conflict in the Middle East will continue to have a major influence on the foreign exchange market, particularly in a context where there are few statistics. Markit is due to publish its barometer for services and the manufacturing sector in the United States on Tuesday. Both are expected to be in expansion phase in February. It is only next month that we should be able to start estimating the effect of the war on the global manufacturing sector.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, a sales offer, or a solicitation to purchase, and should in no way serve as a basis or be taken into account as an inducement to engage in any investment.