Inflation surged, reaching multi-decade highs in mining and metal industry
Why do increasing energy prices affect these industries?
Supply chains are under extreme pressure due to the Russia-Ukraine conflict, booming post-pandemic demand, boosted economies, persistent COVID logistics restrictions, and repeated price records for metals and mining commodities. Numerous restrictions imposed because of geopolitical tensions between Russia and Ukraine are further driving inflation.
Inflation in the mining industry is soaring as rising input costs and high selling prices divert attention from cost control. All mining products suffer from rising labour, diesel, and electricity costs. According to the ifo Institute the expected duration of the shortage of intermediate products in the manufacturing sector will last another 10.3 months. The chart below provides an overview of metal prices and price indices:
The chart illustrates the year-on-year increase in producer price indices for the metals industry in Germany as of May 2022. There is a significant price increase in 2022 compared to the previous year. Iron and steel products show the highest price increase compared to other metals. In contrast, there were no major changes for aluminium semi-finished products. Metals such as lead, zinc, tin and their semi-finished products showed the highest price indices.
The recent rise in energy prices has resulted in a combination of economic and industrial impacts. For companies that use gas to produce metals such as steel, a deterioration of the supply situation for gas would lead to the cessation of their production. This scenario applies to the entire industry, including steel-producing companies such as Thyssen-Krupp, the market leader in the German steel industry. With Russia supplying gas and tensions between Russia and Ukraine continuing, an unstable supply could ultimately lead to a shutdown.
By analysing the overall market as well as market trends for the metals industry we were able to gain insights into how the rise in energy prices might affect the entire industry in the future, i. e.:
- Weaknesses in the supply chain
- Deterioration of profit margins due to the sharp increase in energy prices
- Destruction of demand
- Uncertainty in capital spending
There is a solution to every problem, and the metals industry could see a boost across the market if it focuses on the following.
Innovation for greater productivity: with technological and digital advances that have the potential to revolutionize key aspects of mining, this is where the industry should focus.
Decarbonizing operations: companies can save money in the long run by reducing their carbon footprint. To reduce emissions, most governments and companies are looking to transition to low- or zero-carbon industrial operations.