The Impact of Commodity Prices

Kevin McNealey
Falling commodity prices may feel like good news, but construction cost savings don't automatically follow.

The nuclear energy industry is heavily exposed to commodity price swings, due to the long-term nature of its projects, and the large volumes of commodities used. Overseas manufacturing, with oil-related transport costs and associated currency exchange rates, also have an impact, and the effect of price fluctuations is felt right through the supply chain.

Currently the commodity market is falling. In the short term, suppliers may not lower their prices when markets fall, but rather manage commodity risk by restructuring their manufacturing programmes, possibly restricting supply until prices recover. Nuclear energy clients may only see the benefit in the medium to long term.

If the nuclear renaissance is to continue, investors need to be confident that project costs are under control.

Formulating strategies that protect against volatile commodities markets is therefore a key priority in the commercial management of nuclear energy projects. In our experience, it's beneficial to consider the following:

  • Understand which costs can be controlled and which can't
  • Ensure that there’s an appreciation of fixed element within all costs
  • Source materials much earlier than in most construction projects
  • Negotiate with the supply chain based on real cost data rather than generic published data
  • Ensure sufficient market intelligence to make informed decisions when commodity prices change
  • If prices drop, be ready to respond, advancing purchases and/or advancing the works
  • Consider hedging strategies 

With the nuclear energy sector's most likely route to market now largely rooted in a private sector commercial model, it's important to establish sector-wide interested groups to tackle these issues. The strategies listed above must be based on a real understanding of the movements in commodity prices, specific to the nuclear energy sector. Collaboration is required among clients, consultants and the supply chain partners to face these issues.

If the nuclear renaissance is to continue, investors need to be confident that project costs are under control. This is difficult to achieve in respect of future cost levels on a single project, but more achievable across the sector as a whole.

There are commercial sensitivities associated with cost data across the sector, and these need to be addressed, as they were previously in the OECD-led review (PDF,0.5MB) of the drive for reduction in costs for the sector. Focusing on the impact of commodity prices, rather than the quantity required or the productivity factors in the use of the commodity in construction, could be a way forward.

Focusing on the impact of commodity prices, rather than the quantity required or the productivity factors in the use of the commodity in construction, could be a way forward.

There are inherent difficulties in mitigating all risks associated with commodity prices. However, if the aforementioned strategies were implemented, there would be a greater understanding and an ability to demonstrate control to those investing in the programmes of work.

Faithful+Gould has a detailed understanding of the commercial pressures facing the nuclear energy construction and generation markets, and is equipped to help organisations effectively assess and respond to critical investment/procurement risks.

We have successfully supported clients with project management and commercial services leadership on challenging projects in Europe, the Americas, and the Middle East. Our client portfolio has included British Nuclear Fuels, British Nuclear Group, United Kingdom Atomic Energy Authority (UKAEA), British Energy, NNB GenCo, Horizon Nuclear Power, EDF Energy, Centrica, Bruce Power, Exelon, K.A. CARE, ENEC and Ontario Power Generation.

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