Join our community of smart investors

Higher metals prices come with a cost

Traders are ramping up commodities prices in order to make hay while the bombs fall, says Saxo Bank analyst
Higher metals prices come with a cost

On the surface, the mining world returned to some level of normality last week, when an annual conference in Miami made its return to executives’ calendars. Ivanhoe Mines' (CA:IVN) founder and legendary prospector Robert Friedland made his usual speech about humanity’s future being defined by finding more copper, while the beachside parties returned. 

But this was all accompanied by anxiety over supply, even among those who stand to gain from the record or multi-year high prices of palladium, nickel and copper. There was a shift among traders and others in the market from “worrying about tight supply to actually seeing supply disappear”, said Saxo Bank head of commodity strategy Ole Hansen. 

He said market dynamics were making the extreme pricing increases worse as traders see that a resolution to the war in Ukraine – however unlikely – would trigger a quick drop in prices. “Traders are fully aware of this and what it does in the short term is to create even more volatility as liquidity and conviction levels drop,” he said.

Anything Russia exports is now seen as unavailable, with consequences hitting global supply chains. Miners themselves are also suffering due to higher energy costs, even if they use grid power, so the prices won’t lead directly to puffed-up bottom lines. Metals buyers still have to refine the product in a hugely energy-intensive process as well, so soaring European power prices will extinguish some demand. 

“In addition to the shocking human toll, the first and second order impacts of the Russia-Ukraine conflict continue to pervade through commodity markets,” said BMO analyst Colin Hamilton, whose bank organised the Miami event. 

Aside from oil surging to almost $140 (£107) a barrel, key industrial metals copper, nickel and zinc also surged. Copper’s previous ascent to the current level of over $9,000 a tonne last year, presaged the rise of inflation, and the new price highs in other key industrial metals will trickle down to consumers. 

Palladium has immediately swung into deficit, as has fellow platinum group metal rhodium, according to analyst Tyler Broda from RBC Capital Markets. He said “the magnitude of inflation on consumers” would act as a drag on prices, although he also forecast that this supply shock is unlikely to be long-term. Palladium and rhodium are used in catalytic converters, so form an important part of the automotive supply chain. 

“In time, even if sanctions remain, we would expect that some Russian production will start to make its way into the global economy,” Broda said. 

This is especially critical for food crops. Russia and Ukraine account for almost 30 per cent of global wheat production, according to Saxo Bank. The top importers include countries where increases of even a few percentage points would hit household budgets, like Indonesia, Algeria, Turkey and Egypt. The European milled price shot up almost a quarter in the week to 7 March, to €435 (£360) a tonne. 

Like forecasting an outcome of the war, it is extremely difficult to work out just where commodities will head from here. Hansen said that despite the “historic” price moves, the same forces that sent them skyrocketing could trigger a quick drop. “Any sudden solution that warrants the removal of sanctions could trigger a significant correction across many key commodities, potentially reversing the strong gains,” he said.