Carbon and Steel Walk into a Bar
It’s an age-old joke that has brought resentment from horses and word play aficionados alike, but to a certain extent it’s useful in expressing what has been going on in a couple of markets.
Carbon emissions and steel walk into a bar. The barman looks at them in all their expensive finery and asks what they are having. Carbon orders a Punk IPA and steel orders an Old Fashioned. Having got their drinks, they ask to settle their costs, but when they get the bill, they look at it fairly perplexed. “Is everything ok?” asks the barman. “Well it seems that we’ve cost ourselves a lot more than when we were here last year.”
If you were a carmaker at the back end of 2020 looking to sign your HRC (Hot Rolled Coil) contracts for 2021 you would probably have gotten around €550/t. Around normal levels when looking at the wider context of where prices have been in the last decade. Yet come 22nd June 2021 prices were at an all-time high of €1,206.50/t and still sit at €1,126.75/t today (2nd Sep), or a 119% increase to the high.
Those looking at carbon markets around the same period would have been confronted by a similar situation, whereby prices were wobbling around the €25-30 mark, before in 2021 it dusted off its rocket backpack and smashed through the €61 mark this Monday (30th Aug).
As fundamental as going to the pub is to British culture, so too is the fundamental nature of these two commodities to our future. Steel being such a key product in the economy from transport to construction, and carbon being an increasingly potent product with climate change, their dramatically increased cost are having, and will have, huge ramifications.
Tradewinds ran an article at the start of the year pointing to the increase in steel prices as the reason for shipyards having to significantly rethink their pricing levels for newbuilds, adding millions of dollars to the bills of hopeful ship owners wanting to take advantage of the currently high freight rates.
In the carbon market – EUA being the compulsory European market – have risen significantly in 2021. More recently this has been caused by a drop in gas production for the EU, pushing people into having to offset power production from more unsavoury (environmentally speaking) methods by buying offset contracts.
The demand for a post covid return to economic activity, best demonstrated by China’s quick return to growth, as well as the increasingly political and social need for action on climate action will drive forward further change and squeeze these essential industries and commodities.
Or to put it another way. The future pub may look very different to the one you know now. Gone will be the old school regulars who you only knew by their first name and their usual drinks of tepid ale and stale pork scratchings. Gone will be the stench of fruitily gone off spilt alcohol emanating from the garishly patterned carpet. Gone, therefore, will be the heavily polluting industries of coal, oil, and petrol.
What replaces them will be a teetotal, coffee drinking, Tiktoking, Gen Z environmentalist. The new industries of carbon will be king, and older industries, like steel, will have to adapt to new methods to reduce their environmental impact, all the while keeping up with demand.
Transforming society takes time, effort and money. It’s clear that for the commodity markets this means in all likeliness uncertainty and price rises.
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