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Dollar Signs Green

‘Greenflation’ Is Driving Up Metal Prices. What’s a Manufacturer to Do?

April 18, 2022
Increasing energy costs, geopolitical conflicts, political roadblocks around growing mining capacity and the overall supply chain imbalance have no doubt contributed to current price levels, but demand is also higher than before.

Companies have been grappling with inflationary pains for some time now, especially in the manufacturing space. Labor, materials and equipment costs have soared to record levels, compressing profit margins. While economists expect high inflation to subside once supply chains stabilize, the growing focus on environmentally friendly materials, products and processes will ensure that prices for some commodities—even after stabilizing—will settle well above their pre-pandemic levels.

For manufacturers that rely on metals and other commodities that are experiencing surging demand, we expect this “greenflation” is not transitory and will have an impact regardless of a particular company’s climate objectives. Increasing energy costs, geopolitical conflicts, political roadblocks around growing mining capacity and the overall supply chain imbalance have no doubt contributed to current price levels, but demand for these metals is also higher than before.

As sustainability and climate change mitigation have become crucial areas of focus in the public and private sectors, almost every notable company and country has issued ambitious net-zero emission targets. The United States aims to achieve net-zero emissions by 2050, while China is targeting 2060. Customers are demanding environmental consciousness from their brands. Investors are shying away from fossil-fuel companies and placing a premium on investments that align with climate change. Products with green metals and recycled plastics command a 25 to 30% pricing premium, according to BloombergNEF.

Public and private investments in circular economy initiatives—driven by the concepts of reduce, recycle and reuse—continue to increase. Many corporate loans now carry key performance indicators linked to emissions and sustainability goals, and technology companies have flagship solutions tailored to track, monitor and reduce energy consumption. All of this growing attention around environmental and sustainability issues indicates that companies and countries will continue to focus on such goals and metrics for the foreseeable future.

Industrial Impact

In order to decarbonize, industrial companies are opting for electrification of production processes instead of using fossil fuels. Automotive companies are heavily investing in electric vehicles, and original equipment manufacturers and their suppliers are redesigning products and processes to be more energy-efficient. Companies are incorporating more recycled material to reduce consumption and waste of materials.

Metals and materials that are needed to achieve green goals will play a critical role in all of these efforts—and are already experiencing high demand, driving up prices. Take aluminum, for instance: It makes vehicles lighter, thereby increasing fuel efficiency or lengthening battery range. It is also used everywhere from phones to airplanes and is a metal in demand for many climate change mitigation efforts. Spot aluminum prices surged to above $3,300 per metric ton in 2021—the highest level since 1988. 

Plastic scrap—needed to meet circular economy objectives and avoid potential plastic taxes—surpassed prices of virgin plastic in 2021. Copper, which is needed in every piece of electric cable, is close to $10,000 per metric ton, up from about $6,000 in 2015. Demand and prices for lithium—the world’s lightest metal and a key battery metal—have soared with rising focus on electric vehicles, whose sales are predicted to surge from 6.5 million units in 2021 to 66 million by 2040. Cobalt, a key metal in lithium-ion batteries, also experienced similar price surges.

Supply of these metals in the future is not free from limitations. China, the world’s largest supplier of aluminum, curtailed production of aluminum to meet its own net-zero goals (ironically, aluminum production is energy-intensive). Trading giant Trafigura group warned aluminum buyers that deep shortages of this metal mean the world will run out of stockpiles by early 2024. There is insufficient recycling capacity to recycle plastic needed for circular economy goals.

Governments are investing in additional capacity, but it remains to be seen if it is enough and in time. China is the world’s primary supplier of metals and minerals needed to make batteries, and supply chains involving China are fraught with geopolitical tensions. While some of the short-term supply-demand imbalances may sort out and stabilize prices, it will stabilize at a higher level than before.

Being Proactive

To prepare for these continued higher prices for green metals, product design teams should explore ways to reduce consumption of these materials or explore designs that work around them. Companies might also consider designing products that are more easily recyclable, so they can reuse either the material or product.

Collaborating across the supply chain can also help organizations build recycling capacity and share the costs/benefits between various third parties. Purchasing teams can use advanced technologies to monitor and predict input pricing movements and lock in the right prices. Companies may also consider ‘product-as-a-service’ business models to extend the commercial life of products beyond a single customer. 

Better demand forecasting methodologies using real-time external and internal data inputs along with predictive technologies can also improve reliability of demand forecasts. And real-time visibility across supply chains can help businesses procure the right quantities of materials at the right time and in the right locations, thereby reducing inefficiencies in the form of waste, obsolete inventory and unplanned purchases.

Shruti Gupta has more than 15 years of experience advising multinational clients on their transfer pricing planning, supply chain structuring, global compliance and controversy management strategies. She is a senior analyst in RSM’s Industry Eminence Program, which positions its analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves.

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