When uncertainties blow up energy supplies, the metal industry bears the brunt

When uncertainties blow up energy supplies, the metal industry bears the brunt

When uncertainties blow up energy supplies, the metal industry bears the brunt
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As the disruption in energy supplies continues reverberating throughout the world’s economies, another equally insidious, if less conspicuous, interference is unfolding: shortages of crucial basic and precious metals.

The spasms in the oil and natural gas markets — and, more recently, in agricultural commodities — have dominated the headlines since sanctions were imposed on Russia earlier this year. But the preoccupation with these shocks has obscured the effects of sanctions on the metal markets — particularly precious metals. Whether they involve spare parts or new technologies, sanctions have potentially longer-term consequences for everything from the sustainability of mining operations to the sound functioning of the manufacturing base.

Apart from exacerbating supply chain disruptions fueled by COVID-19, these disruptions compound the price pressures associated with the global shift to an electric economy.

The long reach of sanctions

In early 2022, just as the world economy rebounded from the coronavirus pandemic and production operations resumed, commodity prices spiked but soon began stabilizing. Then the Russia-Ukraine conflict erupted, triggering sanctions unprecedented in scale and speed on one of the world’s biggest exporters of raw materials. As of early November, Russia has been hit with more than 12,000 sanctions, four times the number imposed on the next most penalized country, Iran.
Russia’s biggest commodity players may be the most prominent of the sanctioned entities, but the sanctions affect far more than the sale of their commodities. Consumers, primarily those in Europe — the region that accounts for more than half of the sanctions — have also felt the effects, as many European and US companies in multiple industries suspended their Russia operations.

Among those companies are the leading logistics companies such as Maersk, MSC and CMA CGM, which transport solid commodities throughout the globe, from raw materials to semi-finished products such as rolled steel and copper rods to finished products such as wires.
Supply bans pinch the supply of spare parts for aircraft and heavy machinery, including hauling and loading equipment, tractors, assembly line machinery and drilling equipment.
The resulting crunch in equipment availability is already dampening activity across many sectors, from manufacturing and construction to agriculture, which is already at risk with the farming disruptions in Ukraine and global fertilizer shortages.

Rerouting woes 

Direct export bans on steel imports into the EU and crude oil into the US have sparked price increases and forced a partial redirection of exports. But other, less direct, sanctions have equally deep and often longer-lasting impacts. For example, the export restrictions that have prompted companies like Maersk to suspend operations have forced shippers to rely on inland channels — that is, where such channels exist.
The EU and US ban on Russian non-carbon commodities have made China and other Asian markets the default leading importers of Russian raw materials. But that works only as far as existing infrastructure allows. In fact, existing infrastructure is insufficient for handling the redirection of raw materials in their full volumes.
Rail channels have historically lacked spare capacity, which is unlikely to change anytime soon. Moreover, the capacity at marine ports seems insufficient for current volumes. That is certainly the case at St. Petersburg, a key Baltic basin port. On the other hand, the Azov-Black Sea basin ports, which can serve more destinations, have only marginally extra capacity. In addition, ports need to be situated in a reasonably direct path to those alternative destinations; St. Petersburg, for example, only makes sense for shipping to Europe. But infrastructure is not the only obstacle: the suspension of foreign shipping operations has triggered a worldwide container shortage.

Import implications

Beyond affecting the export of commodities, the imposed sanctions have also complicated the importation of goods, along with providing some professional services related to commodity manufacturing such as exploration, deposit modeling and many others, which, in turn, can jeopardize the production of those exports. For example, most of the mining equipment used in Russia is made by the US and European companies, including spare parts needed to maintain current operations and new technologies that deliver efficiency and safety improvements. That equipment must now take a more circuitous route, crossing two additional borders before reaching mine sites in Russia.
As a result, the reliability of current operations is put at risk, and new projects are either difficult to launch or put on hold. In addition, aging infrastructure poses environmental risks, as we saw with the 2020 diesel spill at Norilsk Nickel, Russia’s worst-ever Arctic environmental disaster. China may have been able to fill the gap, but ongoing coronavirus-related shutdowns and supply chain interruptions have made that difficult, if not impossible.
Meanwhile, the financial sanctions recently imposed by the UK have even prompted merger talks between Norilsk and Rusal — two otherwise unlikely partners — to bolster their stability.

Metal crunch

So, what do these sanction-induced shocks mean for metals?
Basic metals. Since early 2022, Russia’s five basic metals — nickel, aluminum, copper, iron and zinc — have experienced sharp price increases. Continued supply disruptions will keep prices climbing for some of them. Nickel — for which Russia accounts for roughly 10 percent of world output — is likely to see significant long-term increases, thanks to the growing demand for electric vehicles and nonfossil-based energy and the metal’s importance in electronics and steel production. Ironically, EV demand is being fueled by the commodity disruption the sanctions have sparked, leading to a sharp increase in fuel prices worldwide.
Aluminum and copper — for which Russia produces 5 percent and 4 percent of the global output, respectively —   will experience moderate price increases. Apart from their many industrial applications, they, too, figure in EV production and eco-friendly materials applications.
The price of iron and zinc — for which Russia accounts for just 4 percent and 2 percent of the global share, respectively) will likely stabilize as the EU and US economies slow down.
Nonetheless, because Russia produces a relatively minor share of these essential metals, these markets will rebalance. The output that cannot be rerouted will create a market deficit, but it is not expected to cause considerable long-term consequences.

Precious metals

The longer-term picture for precious metals, however, is a different story. So far, the effect on precious metal prices has been modest. But not for much longer. Given the significant portion Russia accounts for and the role these commodities play in the evolving modern economy, increases are highly likely.
Silver is the slightest worry, mainly because of the lack of direct sanctions and Russia’s 5 percent share of global production. Gold is likely to see moderate price increases; as a safe haven investment, it is subject to big swings, particularly in periods of uncertainty. Russia produces 10 percent of the world’s supply, and the country may sell national reserves as the cost of conflict and the sanctions take a deeper economic toll.
The most significant increases are expected in the platinum group. Russia accounts for 37 percent of the world’s palladium supply, essential for hydrogen-based energy technologies and alloys, autocatalytic converters, circuit components and ceramic capacitors. Therefore, we expect the most significant and long-term price increases in this metal. In addition, platinum — of which 11 percent of the total supply comes from Russia — is crucial for auto catalysts and alloys used in electronics, and considerable price increases are likely.
Will metal shortages undermine the energy transition? Widespread disruption in the commodity markets is now a fact of life, and a protracted conflict raises the risk of new sanctions. Industries such as defense, electronics and heavy equipment are particularly vulnerable, and some companies and projects may be unable to withstand the strain and maintain operations.
Demand for the essential commodities for an electric economy is growing — and with it, their prices. It is worth noting that EVs use more than six times more minerals than internal combustion-powered vehicles and that an offshore wind plant requires more than seven times the copper a gas-fired plant takes.
The price increases are already affecting the industry. In June, Ford’s chief financial officer announced that surging materials costs for batteries have wiped out the profit the company expected to make on its electric Mustang model Mach-E. Already, more than a dozen renewable energy developers are postponing, canceling or renegotiating battery projects for power storage, in part because of soaring material costs.
For most of the primary metals Russia produces, the balance in global supply will not change significantly. In the near future, prices will most likely revert to the global consensus-forecast levels. But for those metals for which Russia is a critical supplier and maintaining operations has always been a challenge — namely, nickel and precious metals — price increase is here to stay. Supply disruptions are likely to affect global markets.
Beyond their financial consequences, these developments pose an enormous challenge to the global energy transition. On one hand, disruption in carbon-based energy supply from one of the largest players in that market will provide an ever-strong impulse for the energy transition, which has already been acknowledged by many analysts. On the other hand, an essential player in the metals and minerals market, Russia will play its role in supporting or postponing that transition. 

At this pivotal moment, it's not the public's resistance that threatens the shift. It's rather whether the market can find enough critical raw materials needed to support it.


• Igor Hulak and Jose Alberich are partners at Kearney Middle East & Africa - Energy and Process Industries Practice. Anton Bazanin is an associate consultant at Kearney Middle East & Africa - Energy and Process Industries Practice.

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point of view