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Business risks facing mining and metals 2011 - 2012 - 6. Price and currency volatility - EY - Global

Business risks facing mining and metals 2011 - 2012

6. Price and currency volatility

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Commodity prices - Daily spot prices index (1 January 2009 = 100)

Commodity prices - Daily spot prices index (1 January 2009 = 100)

Source: Thomson Datastream, EY analysis



“We expect the global natural disasters over the last 18 months will not only have a flow on effect on commodity prices, but will also cause supply shortages which will in turn push up prices.”Jay Patel, Transactions Partner, Canadian Mining and metals, EY

Summary: Commodity price and currency volatility over the last few years has increased risk associated with mine optimization, feasibility studies, transactions and contracting.

Price and currency volatility was rated number 9 in our top 10 in 2010, but in 2011 and beyond we see that this risk has grown in importance to many mining and metals companies. Companies’ operating costs are often not in their functional currency, and therefore volatility in foreign exchange prices can put extreme pressure on them.

Commodity prices - Daily spot prices
index (1 January 2009 = 100)

Commodity prices - Daily spot prices index (1 January 2009 = 100)

Exchange-traded funds (ETFs) in the market add a new dimension to commodity price volatility beyond pure supply/demand factors as evidenced by disconnect of price to inventory. For example, in periods of risk aversion and dollar strength, gold prices can still rally in response to inflows into physically backed gold ETFs. When commodity prices fall, investors may offload ETFs which could then flood the market and cause prices to plummet even further. How companies conduct their business in such a volatile environment will be a great differentiator of success.


Steps mining and metals companies can take to respond to this risk:
  • Expanding scenario testing to wider parameters of price and foreign exchange rates
  • Considering adequacy of liquidity arrangements to respond to these scenarios especially for short-term shocks
  • Investigating expanded use of natural hedges


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