Commodities News

Rising Energy Costs Could Push Metal Prices Even Higher

By Ag Metal Miner

Recently, Russian President Vladimir Putin made some tough talk about forcing “unfriendly countries” to pay for Russian gas in rubles, leading us to wonder how that might impact aluminum prices and steel prices.

There are fears that Russia’s economic isolation will begin to affect aluminum prices or steel prices. Those impacts would further burden manufacturers still trying to catch up from the pandemic.

As condemnation over the invasion of Ukraine continues to grow, experts feel Putin may be looking for ways to prop up his country’s beleaguered economy while tightening his hold on the European energy supply.

Of course, his rubles demand comes hot on the heels of multiple discussions focused on whether or not Russia will simply cut off the supply of natural gas and oil altogether. That is a potential worst-case scenario for global energy prices. And though Kremlin spokesperson Dmitry Peskov recently assured the BBC that this wouldn’t happen, skepticism – and, therefore, price instability – remain.

Russia is highly unlikely to simply “turn out the lights” on everyone.

“My take is that Russia needs the revenue from oil and natural gas too much,” MetalMiner co-founder Stuart Burns said. “This means they’re unlikely to shut off or severely restrict supply unilaterally.”

Putin remains unpredictable and may become more so if cornered by the worsening war effort.

Metals markets reacting in the form of aluminum prices, steel prices

Burns also offered some answers regarding how “energy uncertainty” may shake up aluminum prices and steel prices.

“What I do see as a real possibility is self-imposed rationing from two directions,” he said. “First of all, higher natural gas prices are already translating into high electricity costs. Even prior to the invasion, this was leading to smelting operations being scaled back or even shut down altogether.”

Though such production pullbacks were at first limited to the most energy-intensive users, increased oil and gas costs post-invasion are exacerbating the problem.

“We’re already seeing lower production of aluminum, zinc and steel,” Burns added. “After all, Europe is heavily reliant on EAF. However, costs are also starting to affect a range of other products, such as fertilizers, cement, and industrial gasses. This will, of course, provide some support to aluminum prices, steel prices, and zinc prices.”

European governments have mandated reductions in reliance on Russian oil and gas. Though the stipulations and time frames vary, this is worth considering for anyone with even a passing relationship to the metals industry.

“With oil, it will be easier to switch to alternative sources,” Burns added. “But natural gas will be tough.”

There simply aren’t enough liquified natural gas carriers available to move large volumes of LNG efficiently and affordably.

“After years of reliance on Russian pipelines, Europe has limited degasification facilities to handle a dramatic ramp-up in supply,” he added. “And that’s assuming that carriers could be magically conjured out of thin air.”

Change is coming either way

The E.U. recently signed a new deal with the U.S. and other countries to supply an extra 15 billion cubic meters of gas this year. While this is arguably a step in the right direction, what is unclear is how they’ll move it.

Thanks to a global shortage, there are no “spare” LNG carriers lying around like there are oil tankers. Furthermore, that 15 billion cubic meters only represents about 10% of what Europe currently gets from Russia.

“The E.U. has a mandate to reduce its dependence on Russian gas by two-thirds in 2022, but where will the replacement supply come from?” Burns added.

Though they’re sure to prioritize residential users, electricity production, and key infrastructures like hospitals and schools, plans are already being drawn up to determine who may have to suffer rolling “gas outs.” If suspicions are correct, it will likely be the big industrial users.

“In my opinion, the industry could take a hit if the E.U. follows through with its commitments to reduce Russian supplies,” Burns added. “So far, it seems pretty committed.”

By AG Metal Miner

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