Sustainaweekly - Sharp downward price correction in many transition commodities

Many commodity markets experienced one of the biggest shocks in decades as a result of the war in Ukraine, which added fuel to the existing upward price trend. It resulted in a surge in food, metal and energy prices in a short period of time. Higher commodity prices exacerbated inflationary pressures around the world. As a result, making all kinds of low-carbon devices and technologies considerably more expensive. The ABN AMRO Transition Commodity Price Index (TCP) rose relentlessly from May 2020 to mid-April 2022. But since mid-April 2022, the TCP started to correct downward.

Price correction

The ABN AMRO TCP - which is composed of a collection of various transition commodities (see caption in figure below) - rose by 147% from May 2020 to April 2022, or over 6% on average per month. The starting point of the sharp rise in prices coincides with a World Bank report published in May 2020. This report gave insight into the huge growth potential of demand for many raw materials that will be indispensable in the energy transition in the coming years. These include raw materials for producing biofuels, batteries, wind turbines, solar panels, electric cars and the development of hydropower, geothermal and carbon storage (or Carbon Capture & Storage, CCS). In many of these low carbon technologies, metals are often the driving force.

The war in Ukraine also initially caused the prices of many metals to rise further from February 2022 onwards. Indeed, both Ukraine and Russia are rich in all kinds of metals, and the fear of an even greater shortage of metals, drove prices up further. Since mid-April 2022, however, the price trend has started to decline. In the past 21 weeks, the price index has fallen by 22%.

Large differences per transition commodity

As the metals and mining sector is a highly capital-intensive sector, price increases are almost inevitable. After all, the high expansion and replacement investments have to be recovered somehow. Moreover, many metals are indispensable in the energy transition. As a result, there is a probability that demand for metals will structurally outstrip supply in the coming years. This creates even more price volatility. However, growth potential will focus more on specific commodity markets. Those metals needed for the energy transition will get all the attention. The starting point for this growth insight was the publication of the WorldBank report in May 2020. More reports followed soon after that with a similar conclusion about the growth potential of raw materials needed in the energy transition. Renowned institutions such as the International Monetary Fund (IMF), the International Energy Agency (IEA), the International Renewable Energy Agency (IRENA) and also the World Economic Forum (weforum) also attributing a high growth potential to metals demand.

Until mid-April 2022, prices of many commodities rose relentlessly. But because most metals are highly cyclical, the price trend is still very sensitive to trends and shocks in the global economic cycle. And fears of slower economic growth or even recession in the major economies have negatively impacted demand prospects for these metals since April 2022. In China - the world's largest consumer of metals, but also a major producer of many metals - the economy was hit harder by new Covid lockdowns in March/April, resulting in less industrial activity and a weakening demand for metals. The lockdown regime is still hampering the economy in China, although easing seems imminent. Also, interest rate hikes in the US added to the price fall in recent months. Higher US interest rates translated into a stronger US dollar. That made dollar-priced metals a lot more expensive for end-users with currencies other than that dollar. This subsequently depressed demand for metals. Many base metal prices - such as aluminium, copper, nickel and zinc but also steel - as well as the prices of many 'minor metals' - such as rare earth metals, lithium, cobalt, vanadium, molybdenum and manganese - thus fell from May 2022 onward. In the extreme case, this even amounted to a price loss of more than 60%.

Cost of low-carbon technologies

The energy transition is metal-intensive. Base metals are widely used and incorporated in low-carbon technologies. But so-called 'minor metals' also have an essential role in the production process of low-carbon technologies.

Among the four relevant technologies (solar, wind, geothermal and energy storage), predominantly aluminium, steel, nickel and graphite are necessary ingredients. When we aggregate the metals needed for each low-carbon technology into a separate commodity price index for each technology, it is particularly striking that the prices of energy storage and geothermal have increased significantly more sharply than those of solar panels and wind turbines in the period before May 2022. For energy storage, it is mainly the price of nickel and lithium that are not only responsible for a sharp rise in the price index, but they also have a major role in the downward correction that takes place afterwards. The cost of materials for geothermal systems has risen sharply due to much higher titanium and nickel prices, but those prices also decline more sharply from May 2022.

While overall material costs for making low-carbon technologies have fallen sharply from their peak levels, they are still above pre-corona levels. For the coming months, however, economic conditions are not improving. With the intensification of the energy crisis, a recession in Europe is lurking. Furthermore, a mild recession in the US seems highly likely, while the recovery in China is hampered by the continuation of zero-covid policies and specific problems in the real estate sector. Specifically, this means that a rapid return to the peak levels of price indices - and hence total material costs – seen at the beginning of this year for low-carbon technologies is not likely in the short term.

This article is part of the Sustainaweekly of 26 September 2022