The combination of factors including the Russia-Ukraine conflict, stimulated economies, thriving post-pandemic demand, and ongoing Covid constraints on logistics have put supply chains under immense stress, triggering multiple price records for metals and mined commodities. Wood Mackenzie, a Verisk business (Nasdaq:VRSK), believes the price spikes could signal changes in the longer term.
Vice president Robin Griffin said: “A look at notional margins enjoyed by miners suggests that the price rises are fragile at best. Margins are way above historic norms and such a drastic divergence of price and production cost cannot last indefinitely, even if there is an enduring stranding of Russian production.
“The disruption to regional and product price relationships also points to fragility in prices. For example, the fact that Asian steel prices remain flat while iron ore and metallurgical coal prices continue to soar is incongruous, given their influence on steel production costs.
“The conflict will undoubtedly leave an indelible mark on some commodity markets. A prolonged shift in some Russian trade from Europe to China and India, and a lack of western participation in the Russian metals and mining sector are near certainties. But even if we ignore for a moment the serious geopolitical impacts on trade, the price shocks themselves will also engender potentially long-lasting change.”
Some outcomes specifically from the shock of the current price rises might include:
- Buyers taking a more conservative, risk-averse approach. A preference shift towards longer-term contracts is likely, with less spot trade a definite possibility. Some buyers will seriously consider vertical integration into supply chains, once the uncertainty subsides, while governments may move to increase regulation to manage volatility.
- Capital spend uncertainty. Capex could increase given that incentive prices have been well and truly left behind in the current spike. But producers/investors typically need to believe that changes are structural before committing. The extreme volatility may in fact have the reverse effect as investors delay decisions until clarity improves.
- Demand destruction. For some bulk commodities, an immediate shift to alternative fuels is possible, in particular thermal coal and PCI. An accelerated penetration of alternative technologies is also a possibility in the power and steel sectors if high prices persist, including the early advent of low carbon technologies such as hydrogen-based DRI. Battery chemistry competition may also increase as exorbitant prices for lithium-ion battery raw materials drive manufacturers toward alternative chemistries such as LFP. There are of course a range of risks to global consumption from high energy prices that could affect demand for metals and mined commodities.
- Mine inflation surging, as high prices shift the focus from cost control, and input costs rise. This is true across all mined products, where higher labour, diesel and power costs are already taking a toll. Some participants are privately forecasting that cost inflation will hit record highs.
- Price indices coming under pressure. The LME's decision to suspend nickel trading, and nullify completed transactions, has sent shivers down the spines of exchange users. It will take time to rebuild trust, and traded volumes are unlikely to recover immediately. All price indices in affected commodities will see increased scrutiny. Could bilateral negotiations see a renaissance?