Key Takeaways
- Rising energy prices are benefiting coal miners and oil and gas extractors, boosting revenue and profit margins.
- However, these price rises are detrimental for downstream businesses such as steel, glass and clay brick manufacturers, which must now contemplate cutting back on production amid falling profit margins.
- Interest rate rises by many countries’ central banks have weakened gold prices in the short term, but global uncertainty tends to benefit the safe haven asset’s long-term returns.
- Increased commodity prices are expected to positively affect mining sector profits but negatively affect downstream industries. For example, coal prices have risen by almost 150% over the past financial year, which has significantly benefited the Coal Mining industry overall. However, this trend is expected to have negative flow-on effects for downstream industries.
While lockdowns in major cities across China have constrained coal consumption, which has eased price pressure, European Union sanctions on Russian coal that came into force in mid-August are set to further stimulate prices and increase demand for Australian coal.
Coal is still a major energy source for steel manufacturing industries. Consequently, rising coal prices place upward pressure on steel prices. Higher steel prices have in turn lifted the cost of steel-intensive goods. Key examples of these goods include motor vehicles and domestic appliances, such as refrigerators and washing machines.
However, recessionary conditions in China are offsetting these cost increases and inflationary pressures. A large-scale housing recession and a lack of new infrastructure projects from the Chinese Government are leading to lower demand for steel and, therefore, falling iron ore prices.
In Australia, this development will lower the Iron Ore Mining industry’s revenue and profits, with major players BHP and Rio Tinto particularly feeling the pinch. Meanwhile, lower steel prices will help ease inflationary pressures, especially among downstream manufacturing businesses.
Sharp rises in oil and gas prices are placing further strains on production and utility costs for downstream businesses. Gas prices increased by 47.7% in 2021-22, as many energy-intensive manufacturing businesses cut their consumption to reduce costs. However, the reduced goods supply stemming from this cutback in production also places upward pressure on goods prices down the supply chain to wholesalers, retailers and consumers. Rising gas prices significantly affect glass, clay brick, cement and ceramic product manufacturers.
The Coal Mining, Oil and Gas Extraction and Pipeline Transport industries all benefit from higher coal, oil and gas prices . While companies in the above industries are also facing rising purchase costs for inputs such as chemicals and explosives, increased coal and gas prices are expected to benefit them overall. However, the Pipeline Transport industry’s highly regulated nature means that profit-gains are smaller for businesses in this industry compared with those operating in the upstream extraction firms.
Increased government spending on energy transition, especially in North America and Europe, is projected to increase demand from solar panel, wind turbines and battery manufacturers for non-ferrous metals, such as copper and nickel. This projected increase in spending stems from climate change policies and the Russia-Ukraine conflict, which have threatened the supply of fossil fuel energy.
Although the subsequent increase in demand for non-ferrous metals could compound inflationary pressures, this trend would also reverse a more recent downturn in these commodities’ prices, due to fears that central bank monetary tightening would trigger a recession.
Inflation represents a double-edged sword for world gold prices and, subsequently, the Gold Ore Mining industry. Central banks worldwide have been increasing interest rates in the face of rising inflation. As interest rates rise, investors tend to move back to cash and out of other assets, such as gold. This trend is undermining the gold price in the short term. However, gold is seen as a safe haven asset during times of economic uncertainty.
The scale of inflation around the world, which has reached heights not seen in decades, has sparked fears of global economic instability. Consequently, gold prices, which currently total approximately USD$1,800 per ounce, may rise back towards USD$2,000 per ounce during the remainder of 2022. Output in the Gold Ore Mining industry is also expected to rise during the current year. Therefore, rising gold prices and output are anticipated to boost the industry’s revenue and profit margins in 2022-23.
Read Part 4 of our Inflation Series, which analyses the effects of inflation on the Agriculture industry.
