As 2024 picks up steam, there are several emerging trends in the metals world that are likely to impact on traders and therefore on what they need from their CTRM systems. Areas of traditional metals demand have contracted across several major economies, the energy transition is changing demand patterns, and interest rates are in flux. This leads to both opportunities and threats for metals traders, and the difference between the two often comes down to the agility of traders and their systems.
Markets and demand
2023 was a mixed bag for metals markets. Base metals on the LME Index were 7% down on the start of January by December. This was put down to uncertainty from another year of geopolitical risk as well as weak demand in traditional metals markets, with contractions in Chinese manufacturing and construction, US manufacturing and European manufacturing. Indeed, the euro zone is likely in recession given its ongoing contraction.
However, there are also now predictions of commodities prices trending stronger in 2024 due to the likely easing of interest rates by the US Federal Reserve. This could be particularly true in the case of gold and precious metals as gold typically moves in the opposite direction to the US dollar.
And the other growth area for metals in 2024 is in the energy transition.
The energy transition
Materials to support the green energy transition are acting as a counterweight to falling demand elsewhere, particularly in China, which built as much solar capacity in 2023 as the US’s total installed capacity, and saw fully electric vehicles hit 25% of the country’s automotive sales. This growth in green energy demand and the metals that make these energy systems possible is predicted to accelerate in future, with the International Energy Agency predicting that green energy will account for over 40% of demand for copper, 60-70% for nickel and cobalt, and almost 90% for lithium by 2040.
The energy transition may also begin to have more of an impact on demand for greener metals products as companies are increasingly attempting to account for their supply chain carbon dioxide emissions. These are known as Scope 3 emissions, with Scopes 1 and 2 covering the emissions from the company’s own operations and energy consumption. As organisations’ carbon accounting matures, they are increasingly looking to their Scope 3 emissions. There is incredible variation in metals emissions, to take primary aluminium as an example, emissions can range from less than 5 tonnes of CO2 per tonne when hydropower is used for the electricity in smelting, to more than 25 tCO2 /t for coal production. So, as well as the current consideration of siting production facilities near sources of cheaper energy, the use of renewable power sources such as hydropower could also generate price premiums in future.
Carbon border taxes
Differentiated pricing for greener materials will be in place in some regions sooner than many realise, with Carbon Border Adjustment Mechanisms in place in the EU and recently announced for the UK. Both schemes will be linked with each region’s Emissions Trading Scheme, and will impose charges on importers in line with the products’ carbon emissions. The reporting period for the EU CBAM has already begun, and the UK scheme will be implemented by 2027.
The EU CBAM is already beginning to affect trading patterns in the rest of the world. For example, India is considering an equivalent carbon tax on exports in order to use this revenue for the country’s own climate goals. And the Center for Global Development states that this CBAM could result in a decrease in exports from Africa to the EU in aluminium by up to 13.9% and iron and steel by 8.2%, whilst reducing GDP and income across the continent by 0.5%, with some countries more impacted than others. The CBAM will also affect trade flows elsewhere, as some of these lost exports will likely be diverted to other regions such as China and India.
Over time, we will see the impact of these carbon border taxes, and their impact on pricing, production techniques, and whether some products are locked out of regional markets.
What this means for metals CTRM systems
Even without exploring any geopolitical risks, such as the current risk to shipping in the Red Sea, the above market changes show that location and inventory management are going to be crucial for metals traders in the coming years. Not only will traders and logistics professionals need a good understanding of the new carbon taxes across various regions as they change, but they will also need to ensure that they have the provenance and carbon emissions data for all inventory.
This means that the CTRM system needs to include inventory management, or at the very least be well integrated with your inventory and logistics management systems so that all teams have a complete view of the information they need in this changing environment. The system also needs to include strong traceability functionality to ensure your team can prove each shipment’s provenance and carbon emissions both to counterparties and to the relevant authorities.
Metals CTRM systems also need to be flexible in terms of the quality fields they include, as these market changes show that new carbon costs and quality data will need to be managed as part of trading soon – if they are not already. Carbon costs may also feature in pricing in the coming year, so the carbon emissions fields need to be useful system fields that can be used in pricing formulae alongside your other premiums and discounts to help your organisation realise the best price for all shipments.
Whilst the challenges outlined above may be new for 2024, the uncertainty they create is certainly not. Metals CTRMs will need to continue to provide comprehensive FX and forward curve functionality, allowing your team to maximise results with composite curves, as well as pricing for contracts and interest based on any of the variables available to you.
And the key functionality needed to meet new challenges and uncertainties is agility. A flexible CTRM system provides the framework for your traders and operators to act with agility whilst remaining within your risk processes. As well as the flexibility to adapt your CTRM software as your business requirements change, the system should provide flexibility for traders and operators, and allow them the space to operate creatively, whilst the CTRM carries out all the calculations and removes administrative barriers to make this easy for them.
If your CTRM is not ready for the metals environment of 2024, explore how Gen10’s CommOS could be the answer.
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