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Commodities to feel lasting effects of recent price volatility

commodities

Commodities have been unsettled to say the least in recent times, with extreme geopolitical instability a key disrupter to the market.

Supply chains were already out of sync amidst ongoing pandemic constraints on logistics and are under further stress in the wake of the Russia-Ukraine conflict, which has upended a key jurisdiction in the metals and mined commodities space.

The world’s insatiable desire to stimulate new business in the COVID-19 recovery is incongruent to a marketplace currently gasping for air, and so commodity prices have spiked across the board.

Wood Mackenzie (WoodMac) believes the price volatility could signal lasting changes in the longer term as market participants adapt to the situation.

“The (Russia-Ukraine) conflict will undoubtedly leave an indelible mark on some commodity markets,” WoodMac vice president Robin Griffin said.

“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.”

WoodMac suggests there could be several outcomes from the price volatility, which includes buyers taking a more “conservative, risk-averse” approach to the market.

“A preference shift towards longer-term contracts is likely, with less spot trade a definite possibility,” WoodMac said in a press note.

“Some buyers will seriously consider vertical integration into supply chains, once the uncertainty subsides, while governments may move to increase regulation to manage volatility.”

WoodMac said capital expenditure could increase going forward as incentive prices get left behind amidst the current instability.

“But producers/investors typically need to believe that changes are structural before committing,” WoodMac said contrarywise. “The extreme volatility may in fact have the reverse effect as investors delay decisions until clarity improves.”

Buyers might change their tune and alter their offtake strategy as well, which could impact demand for some commodities.

“For some bulk commodities, an immediate shift to alternative fuels is possible, in particular thermal coal and PCI (pulverised coal injection),” WoodMac said.

“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 (direct-reduced iron).

“Battery chemistry competition may also increase as exorbitant prices for lithium-ion battery raw materials drive manufacturers toward alternative chemistries such as LFP (lithium iron phosphate).

“There are of course a range of risks to global consumption from high energy prices that could affect demand for metals and mined commodities.”

WoodMac sees the potential for increased mine inflation going forward, while the recent events involving the London Metal Exchange could signal increased scrutiny regarding price indices as well.

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