WoodMac Vice President Robin Griffin said in a press release that the drastic divergence in price and cost of production could not last indefinitely, even if there were a lasting halt in Russian production.
“A look at the theoretical margins miners enjoy suggests that price increases are fragile at best. Margins are well above historical norms, and such a drastic divergence of price and cost of production cannot last indefinitely,” Griffin said.
“The disruption of regional and commodity pricing relationships also points to price fragility. For example, Asian steel prices remaining flat while iron ore and met coal prices continue to rise is incongruous, given their influence on steel production costs,” Griffin said.
According to WoodMac, the conflict will “undoubtedly” leave an indelible mark on some commodity markets.
“A protracted shift in some Russian trade from Europe to China and India, and a lack of Western involvement in Russia’s mining and metals sector are near certainties. But even if we ignore the serious geopolitical shocks to trade for a moment, the price shocks themselves will also create potentially lasting change,” Griffin said.
WoodMac pointed to several potential outcomes that follow explicitly from current commodity price spikes. These include buyers who take a more conservative and risk-averse approach that could involve a shift in preference to longer-term contracts with less spot trading.
Some buyers are also expected to seriously consider vertical integration into supply chains once uncertainty subsides, while governments may move to increase regulation to manage volatility.
WoodMac also suggested that price spikes could create uncertainty in capital spending. While project incentive prices have lagged behind in the current price increase, the analyst noted that producers and investors generally needed to believe the changes were structural before committing. “Extreme volatility can actually have the opposite effect, with investors delaying decisions until clarity improves,” WoodMac said.
In the meantime, an immediate switch to alternative fuels, particularly thermal coal and pulverized coal injection, is possible. Accelerated penetration of alternative technologies is also possible in the energy and steel sectors if high prices persist, including the early advent of low-carbon technologies such as hydrogen-based direct-reduced iron.
Competition in battery chemistry may also increase as exorbitant prices for lithium-ion battery raw materials drive manufacturers toward alternative chemistries such as lithium iron phosphate.
“Of course, there are a variety of risks to global consumption from high energy prices that could affect demand for mined metals and commodities,” WoodMac said.
Additionally, WoodMac noted that mine inflation was rising as high prices shifted focus away from cost control and rising input costs.
“This is true of all mined products, where higher labor, diesel and energy costs are already taking their toll. Some participants privately forecast that cost inflation will reach record levels.”
Also, price indices are under pressure. The London Metal Exchange’s recent decision to suspend nickel trading and void completed trades had sent chills down the spine of exchange users.
WoodMac expects it will take time to regain confidence and trading volumes are unlikely to recover immediately. “All affected commodity price indices will come under increased scrutiny,” WoodMac said.
Meanwhile, Fitch Solutions Country Risk & Industry Research reports that high-grade nickel consumers are seeking alternatives to Russian supplies as battery manufacturing costs rise with nickel prices.
Russia is the main supplier of Class 1 nickel mining, while China is the biggest player for refining.
Fitch said in its new report that automakers, battery makers and industrial consumers were likely to forge new business partnerships to source high-quality alternatives to nickel as Russian supply remained limited due to the war in Ukraine.
To this end, China-based Tsingshan Group and other companies actively developing lower-grade nickel refining capacity will benefit.
Fitch also noted that changing importer preferences, self-sanctioning and the desire to minimize sanctions risks were affecting Russian nickel export purchases.
As a result, mining and refining operations in ‘safe’ countries with more stable regulatory and trade regimes are likely to benefit.
According to Fitch, Indonesia is likely to see increased interest in refining projects due to domestic politics and the Tsingshan example, but suffers from political uncertainty. Shifting preferences between higher and lower grades will also affect medium- and long-term market forecasts as the market stabilizes and more deals are announced, Fitch said.