On February 24, 2022, the already unprecedented circumstances that we were living in escalated even further as Russia began its invasion of Ukraine. From food to tourism, every industry has taken a hit to different extents around the globe. The 2 parties of this war are some of the most significant players in the commodity game. Russia with its energy and Ukraine with its food, and many other commodities, are suppliers that the world cannot neglect.
Although these 2 major commodities are what these countries are known for, due to this war, other commodities such as metals were affected as production, supply chains and trade lines have faced difficulties.
The commodities sector was already facing a rapid rise over the past 12 months. Until mid-June, crude oil has risen by 65%, natural gas by 125%, coal by 206%, lithium by 436%, coffee by 47%, wheat by 58%, and cotton by 69%.
1. What metals are the biggest movers on the price?
As can be seen below, at the start of this war, the prices of base metals rallied with fear of shortages, however, that rally was not a long-lasting one. Ever since the prices have been in a downward trend and potentially catching up with its previous momentum before the war.
The analysts of Fitch say “Although prices have fallen steeply since April, they remain high in historical terms, reflecting that the metal markets remain generally undersupplied, as evident in global inventory levels”.
Analysts point out that iron ore, out of all metals, faces the least downside pressure. Irons’s main industrial use comes from the production of steel, and construction. Thus, iron having more price stability than other metals is very reasonable.
Nickel prices, a metal that is not subject to the Russian sanctions, are nearing the pre-war levels. However, the tightness in the market is still expected to cause rises in the prices.
Metals such as nickel and zinc have fallen back to their prices before the start of the war. However, many other metals have not stopped at that level and their fall has continued. Copper lost approximately 10% over its price before the start of the war (February 24th). Tin lost 40%, lead lost 12%, aluminum lost 28%, and iron lost approximately 9% since the start of war.
2. What are the supply/demand changes in metals from February to June?
The volatility in metal prices over the past year cannot be denied. between the Coronavirus pandemic and the Ukraine war, supply constraints worldwide, combined with extremely low inventories, are cause for concern. The major causes for the bearish metals market are the devaluation of the yuan and the EU decisions on the exclusion of base metals by sanctioning Russia.
As you can see above, the pressures on supply chains are easing which will help with the tightness in the market to decrease the overall elevated prices in commodities and help pick up the demand as logistical difficulties are dissipating.
Metal prices are extremely sensitive to developments in the Chinese economy as the country is both the largest producer and the consumer. The Chinese economy is expected to rebound in the second half of this year. The lockdowns are not very likely to last until the end of this year and Beijing promised the country an additional stimulus package, both these reasons can provide for the lack in demand for the metals. As cited by Fitch, the regulatory crackdown on the technology industry, real estate and the lockdowns in major cities has gravely undercut the economic activities in the country causing a decrease in metal demand. As the largest importer of metals in the world is finally getting back on its feet, we expect the demand for base metals to pick back up and make up for the weakness in the market
Analysts suggest that the copper inventories, recently, are rising in a healthy manner since the lockdowns and logistical difficulties have caused a fall in demand. Although it is still at historically low levels, there is momentum. Other factors are coming into play on the supply end as the Las Bambas copper mine may revive its operations, this mine accounted for 2% of the global copper production.
As you can see above, the graph identifies the lack in supplies in base metals as they are all below the average of the past decade.
According to the forecasts of UBS, for cooper, lead and zinc, the supply values have decreased concerning this year. The response from producers to the high prices has disappointed the market as it can only be considered modest. Thus, we are witnessing a tight market with low inventories triggering high prices.
Russia is a considerable producer and a major supplier to many markets, of metals such as palladium, aluminum, and nickel. The country is the second-biggest nickel and the tenth-biggest aluminum and copper exporter, which are used in sectors ranging from steel and automotive production to consumer goods and aerospace industries. Ukraine is not a top exporter of these metals, but it is a significant exporter of copper to Belarus, Uzbekistan, Moldova and Azerbaijan. Below, you can see the significance of these 2 countries to the world’s economies;
The exposure to spot prices of producers will become more significant if they fail to hedge power. If not this year, next year as long as energy prices remain elevated. Aluminum and zinc are 2 examples that depend heavily on energy costs. High energy prices can become an issue as they can provoke curtailments around the world if the metal prices do not make up for the rising energy costs. These curtailments may become an issue for productions capacities and hence, supplies.
Fitch has said that “A recent slew of negative global economic readings has revived growth concerns, driving industrial metals back into decline following a muted attempt at recovery early in May. We highlight copper that has erased its gains and is now negative YTD,”
3. Where is the metals market going and what to expect?
Although Nickel is one metal to not be sanctioned over the Ukrainian war, the circumstances caused by the conflict created tightness in supplies. Indonesian productions can help loosen that supply shortage. At the same time, Aluminum is facing the same issue. The inventories of aluminum are low and falling, particularly in Europe. Rising energy costs are not necessarily benefiting the producers and as mentioned before, curtailments are to be expected from some producers if energy costs remain elevated or rise further.
Stimulus measures by Beijing, such as the recent cut to the benchmark five-year prime loan late, may help strengthen the economy in the next half of this year. This cut is expected to stimulate the infrastructure and property industries and lift, especially, the ferrous metals. Thus, a revival is not unlikely for metals in the next half.
The combination of the pandemic and the war, caused issues in the energy sector, a sector which metals market heavily depends on. The difficulties of supply constraints seem to not be easily dealt with and bringing new production has proven to be difficult. To give an example, Chile has not managed to bring any new copper supply into the global market in over 10 years.
As our world is revolutionizing into a greener decarbonized world, metals will become a more and more integral part of industries and our lives. It is safe to say that the shift to green is metal intensive, thus demand is expected to pick up over the long term. Analysts suggest that in order to meet the political ambitions in the renewable energy sectors, by 2040, the metal supply must be 5 times what it is at this point which is extremely unlikely. Meaning a shortage of supply on the road to a greener world is virtually unavoidable.
- Koh, W. C., & Baffes, J. (2022, June 1). Global metal markets: Weakening demand amid constrained supply? Blogs.worldbank.org. https://blogs.worldbank.org/opendata/global-metal-markets-weakening-demand-amid-constrained-supply
- Lazenby, H. (2022, May 27). China drags down entire industrials metals complex – report. MINING.COM. https://www.mining.com/china-drags-down-entire-industrials-metals-complex-report/
- Russian and Ukrainian commodities review: base metals. (2022, May 18). Economist Intelligence Unit. https://www.eiu.com/n/russian-and-ukrainian-commodities-review-base-metals/
- UBS Editorial Team. (2022, May 11). Dip in metal prices offers better entry point for investors. Us. https://www.ubs.com/us/en/wealth-management/insights/market-news/article.1565247.html
- Yao, W. (n.d.). War risk spurs repricing in base metals. ING Think. https://think.ing.com/articles/war-risk-spurs-repricing-in-base-metals/