Saturday, 5 December 2020
Market Fundamentals

Market Fundamentals

Commodity supply disruptions in today’s volatile market

Supply-demand fundamentals have been a key theme since the last quarter of 2016 when Chinese constriction of coal supply saw coal prices sky rocket, followed closely by many other commodity prices, e.g., aluminium, copper and iron ore. Interruption to supply is a re-occurring challenge for the industry. Disruptions have spanned commodities and geographies and impacted the sector in a variety of ways, but the result is usually the same: significant price volatility.

Regulatory policy is unbalancing the nickel market

The nickel market is experiencing supply side disruption from two contrasting events. On the bullish side, we have the threat of a large number of mine closures in the Philippines. On the bearish side is the potential return of Indonesian nickel pig iron to the global market.

In the Philippines, 23 nickel mines were ordered closure and 75 mining permits were cancelled in February 2017. While the Government has permitted eight companies to resume exports, the ruling could impact around 175kt of nickel or 40% of total mine output. The outcome of the order is still not clear as miners have the right to appeal; however coupled with other ongoing political issues in Philippines, an impact to supply must be factored in. In contrast, Indonesia’s plan to permit the export of low-grade ore may balance out the reduced supply from the Philippines and have a positive effect on prices. However, only one miner, PT Antam, has applied for the permit to export 6mt of nickel ore, of which the Government approved shipment capacity of 2.7mt so the impact may be minimal.

Industrial action takes its toll on copper

The impact of disruptions in the copper market are less ambiguous and have been significant so far. The 44-day strike at Escondida is one of the largest disruptions we have seen this year and the longest ever in Chile. It is estimated to have resulted in over US$1b in lost revenue and 220,000-230,000t in lost production.1 Strikes in the first quarter of 2017 as a whole have taken an estimated 425,000t copper out of production, and there are more than 10 more mines in Chile due to renegotiate their collective bargaining agreements this year. In Indonesia, supply was disrupted as ongoing negotiations with the Government halted concentrate shipments from Freeport-McMoRan’s Grasberg mine for about 12 weeks and resulted in an estimated US$1b of lost revenues.2 CRU estimates that disruptions could reach in the range of 1.3mt of copper this year, or around 6% of total production.3

Coal supply disturbed by Cyclone Debbie

Cyclone Debbie has been the most significant disruption to the global coal sector. It caused significant damage to coal mines and logistics infrastructure as it hit the Queensland coast in Australia. Queensland mines produced an estimated 221mt of metallurgical coal last year, and its exports account for 58% of the global seaborne market.4 It is still not clear what the five weeks of interruption will mean for the market overall, but it will impact around 15-20mt of coal and US$3.2b in exports.5 Coal prices have already doubled to reach over US$300/t in April 2017 for some cargos contracted by Japan, so the question now is how this will affect the supply/demand dynamic going forward as prices fall back down.

This supply and resultant price volatility creates and environment of instability, a difficult environment for miners to operate and plan in.

See EY’s Navigating volatility: Do you change your business or the way your business works? The key to success is agility and getting into shape to deal with volatility. This report focuses on six areas that will lead to more effective cash management.

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