The ongoing crisis between Russia and Ukraine is engulfing every nook and corner of world economy, may it be directly or indirectly. The geopolitical tensions and crisis have affected commodity market for one.
Both nations are among one of the largest producers of commodities like oil, gas, metals, base as well as speciality metals.
The exports done by Russia and Ukraine have been dented and as the result of the conflict, food commodity prices have increased.
With a barrel trading beyond 100$, the swift rise of crude oil was palapable and swift post the crisis. This was first time after 2014, as during the period 2011-2014, a barrel traded at an average of 110$.
“Apart from geopolitical tensions, China’s investment cycle remained relatively strong until mid-2014, adding to the demand pressures on industrial commodity prices,” Morgan Stanley wrote in a note. “During this period, Asia’s commodity trade deficits were at their widest, averaging 4.9% of GDP, driven by its energy trade deficit.”
In real terms however, even though the oil prices have spiked to the level of 2014, they remain 27% lower than 2014.
The prices of agricultural products such as wheat, barley, maize as well as metals are reacting, Ukraine and Russia being the major producers of the same.
The report of Morgan Stanley added that due to the trailing strong global demand and the effects of the energy transition and slower investment in commodity sectors, prices of these commodities were increasing.
The commodity market & Russia
Ranging from coal to precious metals, Russia is a huge player in the commodities market. 35 percent of palladium and 10 percent of platinum is produced by Russia on a global level.
When it comes to global aluminium and nickel, Russia accounts for 6% & 5% respectively.
Its steel exports accounted for 6.5 percent of global sea-borne steel exports.
Being one the largest exporter of coal, it accounts for 18 % of global thermal coal exports and over 10 percent of coking coal over the last four years.
Edelweiss Equity Research wrote in a report said that “In our view, the sanctions on Russia would likely flare up commodity prices – already facing the heat of supply disruption during Covid-19.”
This is evident from the 2021 global thermal coal export volumes, which stood at 992 MMT (Million Metric Tonnes), which was 10% less than 2018-19. So, the current disruption due to war can have the prices soaring.
Since the supply of steel, copper, aluminium, and precious metals are impacted, this will affect the energy prices and that of non ferrous metals.
Global cost structure shall be pushed higher due to higher energy and carbon costs.
Senior VP OF commodity and currency research at Motilal Oswal Financial Services, Navneet Damani said that “Base metals have been on a roll for much of 2021, and 2022 got further impetus from Chinese power-led shutdowns and changing monetary policies globally.”
In 2021, aluminium had gained over 40%, in 2022 it has added roughly 20% more. In the international market it currently trades at $3,300 per ton.
Sanctions on Russian aluminium maker Rusal in 2018 drove the metal’s price up 35 percent in a matter of days.
Nickel, which is used stainless steel and batteries for electric vehicles has risen around 20 percent this year, having risen 25 percent in 2021.
Damani added that “Lower inventories in metals along with strong consistent demand had been already supporting the backdrop, and with the latest trigger, it looks like the metal has got some more feet to rally.”
The global supply of food grains like wheat and corn are contributed significantly by Ukraine and Russia.
According to data by the US Department of Agriculture (USDA), Russia and Ukraine together supplied around 27.6 percent of global exports. Together they supplied around 56 MMT of wheat.
Accounting for a global 15.4 percent, both nations exported around 27.9 MMT of corn in 2020-21.
The prices for food commodities like wheat and corn due to the war between Russia and Ukraine shall increase due to the disruption in food grain exports.
One man’s loss, another man’s gain
This war shall potentially aid both the prices as well as volumes. As domestic players shall get an unrestricted access to the steel market in the southeast Asian where Russia has been a price giver, said Edelweiss Equity Research
Edelweiss added: “If Russian exports are curtailed, coupled with the ongoing maintenance activities at Far East Mills and China focusing on reducing steel exports, we are likely to see benefits for Indian steel mills such as JSW Steel and Tata Steel gaining in the export market. ii) Uptick in LME Aluminium prices will aid Hindalco the most, as its integration would limit the cost increase. iii) Jindal Stainless will likely gain from higher nickel prices.”
That said, an uptick in coking coal price might impact the costs of steelmakers although Tata Steel and JSPL may be at a relative advantage.
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