Firms will need to adapt strategies to meet the “new and accelerated” commodities megatrends that have emerged due to the pandemic, according to research.
Country risk and industry research by Fitch Solutions found Covid-19 had accelerated megatrends in the commodities sector, including the ongoing shift to sustainable production, increased technology adoption, the rise of protectionist trade policies, and onshoring of supply chains.
The pandemic is “severely impacting” oil, metal and agricultural commodities and is expected to have a “profound long-term impact”.
Despite industries going into recovery mode, trends suggest a dip towards weaker prices across sectors, as well as operational obstacles and supply chain disruptions, according to Fitch.
“Covid-19 will amplify and accelerate many of the commodities sector's megatrends we have been highlighting in recent years. Industry players will need to adapt their assumptions and strategy to new and accelerated trends created by the pandemic,” it added.
1. Sustainable production and low carbon economy
Covid-19 has accelerated actions around sustainability, with industries particularly vulnerable to negative environmental impacts, triggering more efforts to transition towards cleaner manufacturing practices, low carbon emissions and circular economy models.
Governments are incorporating sustainable development in commodities into post-pandemic economic recovery plans, such as the EU’s agricultural strategies within the European Green Deal, said Fitch.
As the oil and gas industry has already been under heavy diversification, strategies have not “radically altered”, but adoption of low-carbon energy is expected to be “more rapid and more widely spread”.
Europe’s mining and metals industry will also see increased changes to reduce the carbon footprint across the supply chain. Examples include western Europe’s new lithium extraction techniques, the growing use of renewables in steel production, and the creation of the European Raw Materials Alliance for more resilient and sustainable rare earth mineral supply chains.
2. Vertical integration and increased technology
Fitch said: “The pandemic will prompt a rethink of operational strategies, supply chain vulnerabilities and investment trends. Mining and metal players are likely to accelerate the incorporation of technology and automation in operations and to explore their options to shorten and simplify supply chains. Metal producers will also look into vertical integration.”
Metals producers in countries with a high capacity of mineral reserves and easy access to market, such as China, are likely to attempt to vertically integrate supply chains by investing in exploration and technology.
Major miners and metals firms will increase automation. Smaller miners, especially in the Asia and Africa regions, could potentially lose out due to lack of capital for technological infrastructure.
While the long-term price of metals will remain largely “unaffected”, companies are also likely to cut capital spend and exercise financial restraint.
The pandemic is likely to accelerate mechanisation and agtech in global agricultural commodities, especially in developing countries and in areas such as indoor farming, vertical farming and hydroponics.
Fitch said this would bring supply chain improvements and an automation boost. Agtech will become “more widespread” in countries with developed agricultural markets, including the US, EU, Brazil, and China.
Meanwhile, emerging markets, especially in India, will see “more basic mechanisation”, but “strong structural constraints” in Africa and less developed Asian markets will create a barrier to increased mechanisation.
3. Protectionist trade policies
Fitch said: “Covid-19 is also adding impetus to adjacent structural economic and geopolitical trends, increasing domestic social and political risks, accelerating protectionism, raising further uncertainty regarding future international trade and investment regulations.
“Taken together, these trends will significantly impact the commodities sector, from a demand, supply and investment perspective.”
The aftermath of the pandemic will result in a spike in international and local political and social risks in the mining sector, leading to potential mine disruptions, as well as increased protectionist trade and fiscal policies, such as greater royalties and taxes.
Countries at risk of supply disruption due to social instability as political and labour risk rises include India, Argentina and sub-Saharan Africa (SSA) countries, such as the Democratic Republic of Congo, South Africa, and Côte d'Ivoire.
Similarly, the mining sector in most SSA countries, key Latin American countries, as well as Ukraine, Egypt, Mongolia and Myanmar, are likely to be hit by tax and royalty increases, while most of the largest mining countries will remain stable.
Due to Covid-19 disruptions, companies worldwide are shifting towards regionalised supply chain strategies in order to mitigate future impacts. The trend of sourcing domestically or regionally is expected to grow, especially with miners operating in countries with high availability of equipment, technology and materials (Australia, China and the US).
In the agricultural commodities sector, there will be a “renewed emphasis on food security” and a boost in local food production due to vulnerable food supply chains and the rise in protectionism, especially in countries highly reliant on food imports. This will likely result in more governmental or industry-level support for farmers, and diversification of imports.
Fitch said government or private players in Southeast Asian countries and Saudi Arabia were likely to diversify imports.
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