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18 April 2018

Market Change? And Oleg Deripaska



A couple of things have recently caught my eye that may be harbingers of what could be a significant change in the way the metal markets work. First, I guess principally in response to well-founded concerns about some mining methods in some areas of the DRC, Apple have indicated that they are seriously looking at the idea of taking for themselves the responsibility of sourcing the cobalt which will be used in the batteries which power their products. Until now, it has been the battery manufacturing companies who have done this, and then simply sold the finished items to Apple. While I am sure the battery makers are very careful with their sourcing, and run thorough checking of metal provenance, it’s not them who have to have the direct interface with the consuming public. Apple do, and their raising of this issue would seem to be a recognition that consumers are aware of and concerned about the ethical nature of the products they buy. You could, I suppose, argue that it is no more than a cynical ploy to try to differentiate themselves from a competition which is eating into their market share, but I think that would be a wrong diagnosis. More likely, in my view, is that we shall see the competition falling in to line with similar policies. And it's not only in consumer electrical and electronic goods; I understand from good sources that BMW are looking at a similar plan, and where they go, I would fully expect other automobile manufacturers to follow.

The second, similar, report I saw is that Sinopec are looking at a scheme where they will buy copper on behalf of component manufacturers, thus, I guess, using their size to secure better terms than the smaller component companies would be able to do. The motivation here may be different, but the action is the same. It moves the purchasing decision into more powerful hands. 

This is not a new model, of course, and it is one the auto industry is well familiar with. For a long time, car companies have been handling the purchase of platinum group metals for use in catalytic converters. So for them to move cobalt - or other metals - onto a similar basis would hardly be a difficult thing to do. 

Is this a trend which could catch on more generally? Well, I think it could. It is very clear that the provenance of metal is going to become increasingly important and end manufacturers  - as the ones selling a product to the consuming public - are likely to face the greatest pressure to ensure that their raw materials are ethically acceptable. At the same time, bringing exposures to volatile and fairly high-priced commodities more in-house is going to appeal to corporate treasuries. And the impact on the trade? Probably to make life more difficult for smaller traders; after all, the big boys like to play together.


Sanctions

But the subject of the moment is not really ethical sourcing - it’s the impact of sanctions on the market, particularly in aluminium. Oleg Deripaska, EN+ and Rusal are on the sanctioned list and the LME have reacted pretty swiftly to events, suspending new deliveries of Rusal product to the market and being pretty clear to Members about how they should proceed. How this will all play out is right now difficult to predict, but if it lasts any significant time, the corporate repercussions for the two companies could be extremely severe; there’s only a limited amount of time any corporation can function with its access to funding strangled. 

Still, there is a bright side. Back in July 2012, Mr Deripaska informed the world that the aluminium price would “very soon” be back to $2400 (at the time, it was languishing around $1600). I have on more than one occasion criticised that prediction as being unrealistic; well, I’m not sure if six years counts as “very soon” in Mr Deripaska’s world, but he has now got his wish. Just a shame that it’s the difficulties of his own company that have caused it - and let’s have no cynics telling us that even a stopped clock is right twice a day….       




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