Potential long term changes on the horizon for commodities?

Commodity prices have fluctuated over the past few weeks in response to the Russian-Ukraine war. However, some commodities in particular have been feeling the impacts of the Russia-Ukraine conflict more.

Early March, London Metal Exchange (LME) halted a week of nickel trading and canceled trades worth billions of dollars after extreme price moves. The price of nickel soared to over US$100,000 per tonne as a result of potential shortages by Russia, one of the world’s top producers of nickel.

This trade suspension arose when Western sanctions threatened the supply of Russia’s nickel production, making this standstill the biggest crisis for the LME in decades.

“Volatility as an asset class is enormous now, and on top of that you have some serious operational issues,” said a Pentathlon Investments partner and adjunct professor at New York University, Ilia Bouchouev. “It’s a vicious loop where volatility forces companies to reduce positions, which means what’s left in the market is forced trading. That in turn contributes to even more volatility.”

“With high levels of volatility across all LME metals, against a backdrop of geopolitical instability, open interest has fallen broadly in line with expectation, and is a trend that is evident across commodity markets,” wrote the LME in a statement,

Aside from market suspension, natural resources industry research and consultancy company Wood Mackenzie suggests that the ongoing metals and mined commodity price spikes, along with increased geopolitical tensions, revitalized post-pandemic demand and remaining COVID constraints could result in long-lasting market changes.

“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,” said Robin Griffin, Vice President of WoodMac.

WoodMac identified several potential outcomes explicitly resulting from the current commodity price spikes. Outcomes include buyers taking a more conservative, risk-averse approach, which could entail a preference shift towards longer-term contracts with less spot trade. 

Additionally, some buyers may also consider vertical integration into supply chains once there is more certainty again, while governments may increase regulation to manage volatility. 

Another outcome stemming from price spikes could be capital expenditure uncertainty. Griffin commented that producers and investors typically needed to believe that changes were structural before committing. “The extreme volatility may, in fact, have the reverse effect as investors delay decisions until clarity improves,” said WoodMac.

In the meantime, there may also be an immediate shift to alternative fuels, such as thermal coal and pulverized coal injection. If high prices persist, greater usage of alternative technologies is also possible in the power and steel sectors, including the early advent of low carbon technologies, like hydrogen-based direct reduction iron.

With higher prices for lithium-ion battery raw materials, battery chemistry competition may also increase, driving manufacturers toward alternative chemistries like 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,” said WoodMac.

Majestic Corporation has been a leading precious metals recyclers, non-ferrous metals and Catalytic converter provider for around three decades. With a presence in the United States, United Kingdom, Malaysia, Italy, Mexico, Australia, Hong Kong and more, as well as a network of precious metals refineries around the world, we work with major customers and partners in a transparent and discrete manner and only offer the highest quality services at competitive prices. 

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