The Future of Green Premia: a Multi Commodity Perspective

As corporates increasingly commit to "green" commodity production and marketing strategies, it will be critical to understand the prospects for any resulting price premia (and the implications for profitability from investment in decarbonisation).

In this Spotlight we discuss the fundamental drivers of, and outlook for, green premia across a range of commodities. These are shown to differ widely across markets depending on consumer preferences, the structure of individual production chains, and the supply of eligible products in any market, both now and in the future. CRU Consulting have deep expertise in evaluating pricing drivers in metals, mining and fertilizer markets. We are actively helping clients to assess market balances for "green" and "brown" product segments as a basis for better understanding the potential terms of trade or bargaining power in any future contract negotiations.

Green commodities are emerging
One way or another, consumers are likely to pick up the tab for the costs of reducing the environmental footprint of mining, metals, and fertilizer production. However, these can be recovered in different ways, including indirectly through lower returns to equity holdings, or as a result of increased government funding requirements. Of perhaps most direct consideration will be the mechanisms by which commodity prices are impacted. Here, either governments will tax producers in relation to the damage caused, thereby (in theory, at least) encouraging firms to clean up production to avoid a commercial penalty. This is currently the case, for example, with greenhouse gas emissions from the production of steel, aluminium, nitrogen and other industrial products in the EU Emissions Trading Scheme. Alternatively, benchmark prices may remain largely unaffected with consumers paying a premium for greener products.

Differences between a given contract price and a global reference price for a commodity can exist for a whole variety of reasons, including (but not limited to) its product specifications, marketing costs, processing requirements, contract terms, etc. To enable a "green" premium, producers first need to clearly delineate the often otherwise hidden environmental characteristics of their products – based on standards, labels and certificates – which are both recognised and valued by customers. A number of examples of products seeking to demonstrate higher environmental, social or governance (ESG) standards have already begun to emerge across a range of commodities, but (with a few exceptions) remain quite limited in scope.

Sept. 9, 2020 /PRNewswire/ -- As corporates increasingly commit to "green" commodity production and marketing strategies, it will be critical to understand the prospects for any resulting price premia (and the implications for profitability from investment in decarbonisation).

In this Spotlight we discuss the fundamental drivers of, and outlook for, green premia across a range of commodities. These are shown to differ widely across markets depending on consumer preferences, the structure of individual production chains, and the supply of eligible products in any market, both now and in the future. CRU Consulting have deep expertise in evaluating pricing drivers in metals, mining and fertilizer markets. We are actively helping clients to assess market balances for "green" and "brown" product segments as a basis for better understanding the potential terms of trade or bargaining power in any future contract negotiations.

Green commodities are emerging
One way or another, consumers are likely to pick up the tab for the costs of reducing the environmental footprint of mining, metals, and fertilizer production. However, these can be recovered in different ways, including indirectly through lower returns to equity holdings, or as a result of increased government funding requirements. Of perhaps most direct consideration will be the mechanisms by which commodity prices are impacted. Here, either governments will tax producers in relation to the damage caused, thereby (in theory, at least) encouraging firms to clean up production to avoid a commercial penalty. This is currently the case, for example, with greenhouse gas emissions from the production of steel, aluminium, nitrogen and other industrial products in the EU Emissions Trading Scheme. Alternatively, benchmark prices may remain largely unaffected with consumers paying a premium for greener products.

Differences between a given contract price and a global reference price for a commodity can exist for a whole variety of reasons, including (but not limited to) its product specifications, marketing costs, processing requirements, contract terms, etc. To enable a "green" premium, producers first need to clearly delineate the often otherwise hidden environmental characteristics of their products – based on standards, labels and certificates – which are both recognised and valued by customers. A number of examples of products seeking to demonstrate higher environmental, social or governance (ESG) standards have already begun to emerge across a range of commodities, but (with a few exceptions) remain quite limited in scope.