By Brian Collins, Managing Director, Metals, Allegro Development
Volatility, complexity and uncertainty. Increasingly, these are defining characteristics of the international metals industry as it experiences a period of intense change.
Stricter environmental regulation and demands for responsible sourcing are key drivers of these changes. Carbon emissions standards are placing additional pressures on mining practices, for example, while NOx-emissions standards in shipping influence the routes and logistics of marine transport. Waste management, provenance and modern employment practices throughout the value chain are all under the spotlight.
The question is: are metals firms prepared to respond to these regulatory changes effectively and mitigate new risks that emerge?
The metals sector may not be unique when it comes to greater regulatory risk, but the challenge is nonetheless an acute one. Prices have traditionally been heavily influenced by external factors, such as imbalances in global supply and demand,as well as geopolitical uncertainty in primary metal regions. But as more stringent and more diverse regulation increases the compliance burden, internal factors like management capability, operational efficiency and internal control mechanisms become more influential.
Managing the move to a low-carbon economy
The general shift towards a low-carbon economy is forcing metals market participants to think differently. Every aspect of the metals value chain faces more stringent environmental standards and more intense scrutiny.
Carbon pricing is just one example of this broader trend. According to the World Bank[i], some form of carbon pricing mechanism has already been established in more than 40 countries and more than 25 sub-national jurisdictions (cities, states and provinces, for example).
That still leaves plenty of room for the concept to spread, particularly given the attractive revenue-generating opportunities and reputational enhancements it offers to local and national authorities. In the process, more metals and mining firms will be exposed to this particular form of regulatory risk, as well as the financial penalties and drop in shareholder value that comes with compliance breaches.
As more metals and mining businesses come under the auspices of external pricing – or indeed adopt their own internal pricing mechanisms – they will need the ability to track prices effectively, hedge their exposures and calculate the true financial impact of any operational trade-offs. Without this capacity, quarterly earnings become more erratic, accounting becomes more complex and stakeholder value becomes less predictable.
Waste management becomes a global concern
Of course, carbon is not the only waste product that is under scrutiny. Deleterious waste generated at each stage in the production process is also subject to increasingly strict standards and regulations. Many industries have been grappling with this problem for some time. However, it is particularly egregious in the metals sector – where the average amount of waste produced by the 12 major metals and commodities is around four times the weight of the total metal extracted.What’s more, as ore grades decline and firms tap into deeper ore deposits to compensate, the ratio of waste to produced metal is only set to increase.
In previous decades, the metals industry was able to circumvent the initial forays into environmental legislation by moving their mining operations or refining facilities emerging economies with lower regulation standards. Increased demand has inevitably led to increased production in these countries; and more product increases revenues – at least initially.
However, the resulting increase in waste material has upped the pressure from government bodies to develop appropriate mitigation strategies. As a result, operational costs have also increased around the world and will continue to do so as more areas reject all but stringently monitored, managed and audited waste management procedures.
Traceability is key to future success
Increasingly, customers and end consumers demand assurance that each stage of a supply chain for finished or semi-finished products meets these stringent environmental and ethical standards. At the same time, sanctions regimes and other political measures for prohibiting trade create a different kind of jeopardy for international metals businesses – often in a very short time frame.
In this environment, regulatory arbitrage is a much more difficult game to play.The rippling consequences of compliance breaches have a longer-term impact than indicated by a blip in the share price, and metals businesses may have to adopt new strategies in order to stay on the right side of both the law and public opinion.
Meeting stricter traceability standards requires the right tools: firstly, to ensure that responsible sourcing is taking place and, secondly, to prove it to the competent authorities.
Traditionally, metals and mining have been under-served by the right kinds of tools.Even when commodity trading and risk management (CTRM) solutions with the necessary functionality to manage regulatory risk are in place, they have often fallen short on functionality specifically designed for metals. Rigged-up generic systems and business software are even more unsatisfactory.
The ongoing success of metals and mining businesses will depend on having these tools in place – and ensuring that the right people within the organization have access to them at the right time. When uncertainty is the only thing businesses can be sure of, they need the technological support to deliver efficient operations, insight, analysis, agility and control.These are the characteristics of successful businesses that are both responsive and compliant in a fast-paced world.
Metals industry participants need a solution that can be easily adapted to individual processes and prepare them for industry changes and business growth; CTRM solutions, such as Allegro Horizon developed by and for the metals industry,should increasingly be seen as a critical success factor.Managing regulatory risk as it changes shape and creates more volatility is as essential to good business as managing price risk.