Compared to pre-Covid-19 levels, metal prices are expected to remain elevated this year and next as a result of high energy prices constraining production; Russia’s invasion of Ukraine, which is causing a massive dent in global metal exports from both countries combined; logistical issues and high shipping costs; and positive investor sentiment towards the metals complex in general.
Financial risk management, solutions and insights company Fitch Solutions Country Risk and Industry Research (Fitch Solutions) reports that supply concerns prompted by the war and sanctions on Russia have led to a rise in the prices of a number of metals, including nickel, aluminium, copper, platinum and palladium, which were already rallying as a result of a number of idiosyncratic reasons before the invasion.
In addition, global inventories of metals also continue to hover around historic lows, making them highly exposed to external factors.
While a stronger dollar and weaker manufacturing activity in China – owing to the country’s zero Covid policy and fresh Covid-19 lockdowns – has limited the extent of the metal price rally in the second quarter of this year, Fitch Solutions still expects prices to average at multi-year highs this year.
Although higher prices will support revenues for miners and metal producers, Fitch Solutions reports that surging costs of inputs, along with elevated freight costs, will squeeze margins, leaving firms with limited scope for major investments in decarbonising their operations.
Further, higher costs of energy will be felt by mining firms, dependent on electricity from the grid, particularly by smelters of aluminium and nickel.
In this regard, Fitch Solutions’ oil and gas team highlights that upward pressures on energy prices are likely to persist over the first half of this year, squeezing margins of firms which do not either generate their own electricity from renewable sources, or receive state subsidies.
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The firm also notes that greater logistical difficulties with freight transport also increase risks for firms exporting their commodities.
High volatility and unpredictability in commodity prices also make the outlook for major investments more uncertain, reveals Fitch Solutions.
Spending on new, greener technologies such as mine electrification requires considerable capital outlay and will be less attractive at a time of particularly elevated risks to prices of key inputs.
Additionally, at current high metal prices the cost of long-term investments in decarbonisation may be prohibitive. In particular, concerns around supply since Russia’s invasion of Ukraine have pushed up prices of aluminium and copper to new historical highs – both of which had been rallying significantly as global output remained below pre-pandemic levels amid rising demand from the post-pandemic recovery.
However, the additional stress of the Russia-Ukraine conflict has pushed them to break records as Russia is a major exporter of these metals.
Meanwhile, steel prices have also been climbing, and Fitch Solutions expects them to average at a record $980/t this year as Ukraine steel exports are taken off the market.
In addition, prices for nickel have risen since the war owing to sanctions imposed on Russia and have demonstrated considerable volatility on metal exchanges. Russia accounts for around 8% of global nickel supply, and is the world’s largest producer of high-grade Class 1 nickel that is used in the manufacturing of nickel-manganese-cobalt batteries that are required in electric vehicles (EVs).
Together, these higher prices make the overhaul necessary for significant decarbonisation of metals operations significantly more expensive, as these metals are required in the green transition of mining operations.
Fitch Solutions also anticipates that the war will cause some delay in the emergence of green premiums as a financial incentive to decarbonise.
A consistent price differential between “high-carbon” and “low-carbon” metal would create stronger incentives for mining and metal players to reduce the greenhouse gases associated with their operations. However, the firm suggests that these are further off than it expected before the invasion of Ukraine on February 24.
Nonetheless, Fitch Solutions notes two main risks to its forecast which could result in an acceleration of miners’ decarbonisation drive beyond its expectations, with the first being a quicker-than-expected end to hostilities in Ukraine which could reverse some of these trends.
However, the firm’s global team anticipates that sanctions would still largely apply in the event of an early peace deal, so the effect of this on the trends analysed here would be limited.
Secondly, Fitch Solutions suggests that a sharper slowdown in global growth than its core view of between 2.8% and 3.6% could lead to a fall in demand for industrial metals and place some downward pressure on the prices of some metals required for green infrastructure investments.